The U.S. Asset-Backed Securitized (ABS) and Mortgage-Backed Securitized Market (MBS) presents a unique opportunity for investors seeking to diversify portfolios. As equity markets continue to rise, investors are looking past immediate growth concerns and market risks, choosing to focus on potential improvement in 2026. In this context, any rise in core government bond yields could be an opportunity to lengthen duration positions. However, the risk of higher and more volatile inflation in the U.S. is a headwind to this strategy. Securitized assets offer an alternative, providing diversification and additional yield potential.

More income, more diversification

At the index level, ABS and MBS have a low duration and a relatively low correlation to equities (0.2 and 0.3, respectively). This can make securitized assets an additional source of diversification to equity risk in a portfolio, offering yields comparable to investment-grade credit. The current yields of ABS and MBS are just 4.5% and 5.1%, respectively.

Securitized assets differ from other types of fixed income in that the risk is spread across tranches, and income is generated by the payments on the underlying loans. They also provide a way to take more specific exposure to the economy, such as the real estate market or the consumer sector.

RMBS: Not enough houses

Higher mortgage rates and an undersupply of houses are supporting the outlook for Residential Mortgage-Backed Securities (RMBS). Higher interest rates in the U.S. and a slower easing cycle by the U.S. Federal Reserve (Fed) have kept mortgage rates elevated and vacancy rates low. The average mortgage rate was 6.9% in May, leading to fewer homeowners seeking to refinance mortgages that are financed at much lower rates, thus lowering the prepayment risk associated with MBS.

The low unemployment rate, positive real wage growth, and low homeowner vacancy rates have held down loan defaults and foreclosures, which further mitigate the risk to MBS investors in the near term. Longer term, the structural undersupply of U.S. housing, as household formations outpace supply, suggests the residential market will be supported. 

CMBS: Back to work

The commercial real estate market faced significant challenges during the pandemic due to remote working trends. However, more companies are encouraging employees to return to the office in the office segment. The market remains bifurcated across the prime and non-prime space, with prime locations experiencing higher demand.

Commercial residential real estate could offer more opportunities. The undersupply of residential housing and affordability issues are creating increased demand in the rental market and enhancing the appeal of CMBS linked to the single and multi-family rental markets.

ABS: A healthy consumer

A feature of the resilient nature of the U.S. economy has been the strength of the U.S. consumer and the robust nature of the household balance sheet. In aggregate, the U.S. consumer balance sheet shows total assets of USD 190.1trillion compared to liabilities of only USD 20.8trillion. The increase in both the value of homes and the stock market has helped to lift total assets.

The distribution of wealth in the U.S. is skewed, and lower socio-economic groups have been impacted more by previously high levels of inflation. Early delinquency rates (payments late by 30 days or more) on credit cards and auto loans have risen but remain lower than prior peaks, and outright defaults remain low.

Unlike in MBS, where prepayment risk can create negative convexity for investors (ie., the price of the security does not increase proportionately with a decline in yields), which can change the expected level of income and add to volatility in returns, ABS have positive convexity as loan conditions often prevent early repayment. This can lead to securitized assets having a counter-cyclical property and can outperform other types of credit when spreads widen.

ABS benefit from structured credit enhancements, such as overcollateralization, which occurs when the value of the underlying loans is greater than the principal amount of notes issued against the loans. This can create a buffer for investors as it serves as a loss absorber if there are defaults. 

Investment implications

The fading expectations of a recession, a mild pick-up in growth from fiscal support in 2026, and only a moderate softening in the labour market have supported trends in credit and the securitized market.

Securitized assets are another source of diversification and income for portfolios at valuations that are not stretched, as spreads on ABS and MBS are close to average levels for the last 10 years rather than historical highs.

However, a sharper deterioration in the housing market may lead to rising delinquencies or a faster cutting cycle from the Fed that would increase prepayments and lower total returns.

While the consumer, on aggregate, appears strong, an active approach to ABS is needed given that the rise in wealth has not been felt equally, and default risk can be skewed.

The risk of privatization of U.S. government-sponsored enterprises, such as Freddie Mac and Fannie Mae, is low in our view, but regulatory influence will need to be monitored.

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