Mortgage Backed Securities – Tom Mansley

What were the major recent events and impacts on your asset class?

Well as you know, market does tend to move slowly. It's more of a strategic rather than tactical allocation as macro factors evolve. The most significant thing has happened lately, of course, is that the Federal Reserve Bank has paused in their hikes and the new mantra of higher for longer rather than more and multiple hikes is what's prevalent in the marketplace now. So a few weeks ago, even we had over 100 basis points of cuts built into the forward curve. Well, that's simply not going to happen. And the market realises that and that, hence the rise in rates. What's that doing to home prices? Basically nothing. We've had a very slight pullback about 2% in the last year, middle of last year. And today we're actually higher than that. So we've stabilised and resume the mild increase as the supply and demand factors overwhelm the higher rate. Again, a massive shortage of housing in the United States and a lot of demand for it.

What can your asset class offer in the current environment?

Simply put very stable cash flows. And since the yields are, the base yields going up everywhere, of course. However, spreads in our space are relatively wide, not as wide as the Covid peak, but certainly out there, which results in a relatively high overall base return.

What is your outlook in the near and medium term?

We're looking for continued stability. Consumer credit is still very strong. Of course, we're coming off of record low delinquencies and foreclosures and things of that nature. So of course that's going to tick up as we move forward but still remain far below average. So consumer credit is strong. Remember this is a fixed rate mortgage regime. So people really don't care if the market rate goes up. They've already got their nice little mortgage which is at a very low rate. It's a good time to collect the yield. We have that solid credit upon which to build and just sit and wait and collect a really nice yield. Longer term, I would also look for spread tightening. What we've got is a low supply of mortgage backed securities going forward. Higher rates, of course, they put downward pressure on supply in terms of refinancing in terms of new purchases. Because as all that slows down, there's less new product being created, yet there's still demand in fixed income for those cash flows. And therefore the spreads should come in and hopefully get some sort of capital gain.

Is there one chart you’re currently monitoring closely?

I would say no. It's more of a mosaic at this point. So we're looking at the macro and the micro. In terms of macro, everything looks pretty good for consumer credit, particularly in secured by asset at this point in time. And at the micro, the credit is good. Remember a vast majority of our holdings today are mortgages that were issued prior to 2008. They've been in their homes for a very long time. Demonstrated ability to pay. You've got a home price that's much higher than it was back in 2008 or prior, and a mortgage, which is much lower, providing a nice big equity buffer. And finally, the, I would say 95% of the portfolio is senior in the capital structure. So you are first in line to get your money back on a solid credit to begin with, which is secured by an asset. So that looks pretty good.