1. Q - Consumer: With the exception of the lowest income cohorts, U.S. consumer fundamentals have been in solid footing which has been a powerful tailwind for various securitized assets backed by the consumer. Is this still the case or are you seeing/anticipating a deterioration in consumer balance sheets in light of poorer jobs report/revisions?

A - The consumer remains the cornerstone of the U.S. economy. In aggregate, consumer balance sheets benefited significantly from the wealth effect driven by rising home and asset prices. However, these gains have not been evenly distributed. We believe the current environment continues to reflect a K-shaped recovery, which we discussed earlier this year where lower-income households largely missed out on these benefits and continue to face financial challenges, while higher-income groups accumulated wealth and sustained robust spending.

The lower-income cohort has also seen increased defaults and delinquency both in credit cards and auto loans, as well as in various consumer loans making us lean more heavily on higher quality parts of the capital structure as well as on more programmatic issuers.

While we see evidence of a spending slowdown and trade-down amongst the lower-income consumer, there continues to be some positive developments for this income cohort as well with declining gas prices, peaking rents, and continued positive wage growth providing much-needed support.

Additionally, we expect that most Americans will benefit from the OBBBA (One Big Beautiful Bill Act) as well as higher tax refunds, which could serve as a tailwind in early 2026, somewhat similar to the impact of previous stimulus checks.

While consumer sentiment has softened and there have been a few notable layoff announcements, we continue to see overall consumer health as solid, with little sign of systemic weakness although we monitor defaults and delinquencies at lower income cohorts more closely.

2. Q - Housing: Housing market affordability remains historically challenging pushing potential buyers to the sidelines while supply is creeping higher. The administration is contemplating declaring a national housing emergency. Is there a solution? Can Federal Reserve (Fed) rate cuts alone bring down mortgage rates?

A - Housing affordability remains historically challenging, primarily due to a persistent structural shortage estimated at 2–4 million units, depending on measurement assumptions. This deficit is partly a result of subdued construction activity combined with robust household formation (please also see our recent blog on this topic). More recently, the surge in mortgage rates above 6%—after the Fed began raising rates in 2022—has led to a market freeze (please see Figure 2). Elevated rates have created a “lock-in effect,” with existing homeowners reluctant to move and give up their low-rate mortgages. As a result, we are witnessing near record low housing activity and more Americans are renting rather than owning, making housing affordability a prominent election issue.

The Trump administration seeks to address these challenges and Treasury Secretary Bessent noted earlier this year that “everything is on the table” to improve affordability. Mechanically, to improve affordability we will need to see a combination of rising incomes, falling home prices and falling mortgage rates. However, Fed rate cuts alone are unlikely to have a significant, direct impact, as mortgage rates are more closely tied to the 10-year Treasury yields. While it is difficult to pinpoint the exact rate needed to revive the housing market, we believe a 5% mortgage rate could be a reasonable target, which would require the 10-year Treasury yield to fall by approximately 100 basis points to around 3%.

Fundamentally, a long term solution to affordability includes a substantial increase in new construction to balance supply and demand. Achieving this will require coordinated efforts at the federal, state, and local government levels, including reducing or eliminating zoning restrictions to allow more multifamily development in high-demand areas currently zoned for single-family homes. We have already seen this in some geographies (Florida, Texas, etc…) but this remains challenging at the national level and, as such, we do not foresee any quick fixes to affordability issues.

3. Q - Commercial Real Estate: Walking down the street in New York City (NYC) we are seeing more and more people going to offices and it appears that the worst of Office Commercial Mortgage-Backed Securities (CMBS) is behind us. Is this a NYC specific development or is office property type experiencing a comeback?

A - We believe office property prices have likely reached their trough, but ongoing challenges persist in some parts of the CMBS market. Because corporate leases for office space often run for 5 to 10 years and are difficult to terminate, it will take time to fully assess true office space demand relative to supply. The shift to hybrid work prompted some firms to downsize their office footprints to reduce costs, although that might be reversing more recently. On the supply side, office conversions to residential multifamily units have modestly reduced available inventory, and new construction remains limited—except in markets like NYC.

Looking ahead, we believe the office CMBS market remains highly bifurcated where Class B/C offices will face challenges in weak geographies without additional sponsor support. On the other hand, high quality assets with strong tenant base, in better geographies are likely to outperform. We see this bifurcation in two main areas:

1. By Geography: NYC leads other major metros in office performance metrics such as availability (see Figure 3), delinquency, and pricing, while cities like Washington DC, Chicago, and San Francisco lag behind. Even within metros, there is divergence; for example, in NYC, areas like Park Avenue and Hudson Yards are thriving, while downtown financial district and, to a lesser degree, 6th Avenue are underperforming.
2. By Property Class: Class A offices with state-of-the-art amenities continue to perform well, even in challenged markets, as employers use these spaces to attract employees back to the office. In contrast, lower-tier office properties are struggling in most markets (NYC being the notable exception) and will require significant capital investment and upgrades to regain demand.

This market bifurcation presents potential opportunities for active managers. More write downs at a bond level cannot be ruled out which creates an environment that favors those with rigorous credit selection and deep sector expertise. In this complex landscape, our underwriting process remains exceptionally thorough and disciplined, allowing us to navigate risks while capitalizing on the significant opportunities that arise.

4. Q - Trends in securitized: Securitized markets continue evolving/innovating and we have seen new, esoteric sectors emerge where the structure is backed by private assets, including music royalties, sports ventures in addition to infrastructure and private credit middle market loans within CLO structures. What are your thoughts here in terms of risks and liquidity?

A - We are enthusiastic about the growth and innovation within this asset class, which is increasingly expanding into financing areas traditionally dominated by banks. Regulatory changes, including the Dodd-Frank Act, significantly constrained banks’ ability to lend by making certain loans prohibitively expensive from a regulatory capital standpoint. As a result, small and mid-sized companies sought alternative sources of funding, such as securitizations, asset-backed finance, and private credit. This may change, however, and banks might become more engaged, post the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) withdrawal of Interagency Guidance on Leveraged Lending from 2013. We expect issuers will likely “shop” across public, private, and securitized markets to secure the most favorable funding terms.

When evaluating new deals, it is essential to thoroughly understand the underlying assets, assess potential cash flow impacts under various scenarios, estimate recovery rates in the event of default, and evaluate the strength of the sponsor. In the realm of private credit, the lack of liquidity and transparency remains a significant consideration with price discovery remaining an elusive proposition, as we have seen with some of the recently defaulted private loans (see our recent publication on this topic). While we see a role for private credit within a diversified asset allocation framework, we are somewhat cautious about current valuations, as there appears to be an exuberant amount of capital competing for limited set of opportunities.

5. Q - Opportunities for investors: Given the current market backdrop, where do you see the greatest opportunities in terms of adding exposure? Conversely, what are you avoiding?

A - As an active manager, securitized sectors continue to serve as a potential source of alpha within many of our strategies, with allocations that reflect our conviction in its potential. How we express this view depends in large part on the strategy and its objective. Generally, our focus has been up in the capital structure, though in certain strategies we have been selectively adding down the capital stack in sectors with strong underwriting and deleveraging trends. We have a positive outlook on bonds backed by U.S. housing market and believe that both single-family and multi-family Residential Mortgage Backed Securities (RMBS)will continue to perform well, as these bonds have historically demonstrated resilience in our risk models. We are constructive on the consumer Asset Backed Securities (ABS) sector, favoring short-term ABS bonds versus short-duration, high-quality corporate investment grade credit. In CMBS office space, we remain cautious on bonds backed by non-trophy, Class B and C office properties in weak metros, but see value and are adding bonds backed by trophy assets. Overall, we view the CMBS office market as highly bifurcated and are very selective in our approach.

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