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  • Jonathan Poyer

Diving Deep into the Waters of RMBS Investing. Should We Give Up on the Sector or Can It Become Attractive Again?



Spreads are tightening. Average corporate spreads on investment grade and high yield now stand at the tight end of their 5-year range; ABS, CLO, and RMBS credit are all tighter as well. 



We took a deep dive into residential real estate earlier this year. It is definitely worth the time (A Deep Dive Into Residential Real Estate - Bullet Points, Charts, and Graphs, Oh My! (alphawatch.blog)).


In this conversation, Garrett Smith from Garrison Point Capital covers investing in the RMBS sector and why it might become an alternative to core fixed income in the coming months.


Something to think about: insurance companies have had an influx of annuity money and thus have been buying duration and credit. The market has near-record quantities of assets wait in cash alternatives and could drive spreads tighter at any moment. All in all, issuance last year was minimal.



Strap in for a great and in-depth conversation.


Intro - Fixed income investors and the investing landscape.  Why leave money markets?

How to get 5-6%

Treasuries/Money markets the place to be

 

2:02 – things starting to change

Powell indicating a potential cut

Where do I want to be a year from now when rates are lower

 

3:03 – what does the RMBS chain look like from a homeowner to a product

walking through the package and the difference between agency and non-agency

 

8:25 – what happened to these packages post GFC?

Legacy and “new” non-agency mortgage

 

9:15 – the investing in these homeowners and why they are a good place to invest

The fundamentals of the structure and the strength of the credit

 

11:05 – despite the fundamentals, why are these investments not delivering returns?

Technicals are causing issues – especially assets leaving the sector

 

13:50 – where is the demand for these funds and assets?

Insurance companies because of annuity sales

Insurance companies trying to buy up duration and credit spreads where they can find it

Why and what they are looking around at – hint: legacy RMBS

 

16:50 – the 4% threshold for rates

 

20:13 – loss write-backs and why the 4% bogey impacts those important characteristics

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