US credit markets took a hit in March as uncertainty over government policy and its macroeconomic impact finally broke what had seemed a one-way street to spread tightening, even amid some of the Trump administration's more surprising early moves.
Securitized products were no exception. Bank of America researchers two weeks ago predicted spreads would widen by 15%-30% — at least.
Yet some volatility in the asset class was overdue, and investors should welcome it.
For weeks before this, fund managers had expressed their frustration that spreads were too tight across securitized products. At the jumbo SFVegas conference in late February, it felt like all anyone could talk about was how tight everything was.
It was inevitable there would come a turnaround. Tariffs, inflation, recession concerns were always going to take their toll eventually.
Beyond the short-term noise, however, the shake-out has mostly just brought a fresh set of value propositions.
These same bonds are backed by the same assets as before, and while the external environment made it hard to justify them being priced for perfection, the deterioration in fundamentals is unlikely to be so severe as to materially impact structures.
No end in sight
This week, sentiment has appeared to reverse course, with April's tariffs set to be less severe than previously expected, and support from last week’s dovish Federal Open Market Committee meeting.
Indeed, BofA immediately dialled back its pessimism, updating its forecast to a 0%-15% widening.
It is unlikely the volatility is over, even as markets cling to any positive ray of light. Nothing about the current administration suggests an end to policy uncertainty.
Yet there is plenty of room for reassurance. The sell-off looks largely technical at the moment, having occurred across securitized sectors, while the credit curve has not steepened.
Moreover, spreads in many sectors aren’t even close to all-time tights.
Triple-A rated passthrough prime jumbo RMBS bonds are, at 155bp on average, in their 67th spread percentile over a five year period, according to a Bank of America report from March 21.
Non-qualified mortgage triple-A paper is at 145bp — in its 54th percentile, BofA says. It has already widened about 30bp from the 2025 tight of 115bp.
Through the noise
All this points to securitization's appeal still being there for investors who can take a long-term view. All-in coupons, for example, are still higher than they have been for years, and the fundamentals are intact — whether in RMBS or CMBS.
This benefits investors, who are able to play higher up in the stack and find yields to hit their investment profiles.
Therefore, even if you're someone worried in the long term about inflation or a recession brought on by President Donald Trump’s policies, securitized products have something for you. The asset class offers significantly more spread than just a month ago, while continuing to benefit from robust structures.
With plenty of macro-induced volatility on the way as the Trump administration insists on a back-and-forth approach to economic policy, opportunities are likely to continue to emerge.