The monetary and fiscal stimulus delivered since the coronavirus pandemic erupted is unprecedented in size and scope. The volume of negative-yielding assets has surged since March and $12.4trn-worth of bonds now have a yield below zero.1 So far this year, there have been over 140 rate cuts – which is close to the run rate of 2009.2
Interestingly, this year’s rate-cutting frenzy took place in the context of already-low interest rates.3 Today, the average emerging-market interest rate stands at just 3%. What perhaps best encapsulates the thirst for yield is the emergence of €400bn-worth of negative-yielding European corporate bonds – which accounts for 15% of the market – in just a matter of weeks, the quickest surge on record.4
As a result, it is inevitable that investors will search for solutions that compensate for these negative accruals on higher-quality bonds and cash balances. In light of this, structured credit seems to have become an ideal place to look for seemingly lower credit risk exposures that deliver higher spreads.
In this webinar, Stephane Michel, Senior Portfolio Manager, and Andrew Lennox, Asset Based Securities Portfolio Manager, unpick the world of structured credit and look at the benefits of securitisation to the real economy, as well as the possibility that investors could achieve attractive returns without necessarily dialling up on risk. In particular, they look at:
- The type of assets that are typically securitised, how to tailor portfolios to match clients’ risk appetite and what asset-backed security (ABS) managers focus on when selecting assets.
- The influence of macroeconomic factors, namely how levels of unemployment, changes in household debt as a share of income and the affordability of that debt all affect the pricing of these asset pools.
- The impact of the pandemic on payment holidays and forbearance measures and how this has interrupted cash flows.
- How UK house prices have affected ABS-pool asset valuations and the ways in which these mortgage pools behave when confronted with the price declines seen during the global financial crisis.
Michel and Lennox also highlight the differences between the recent market drawdown and the global financial crisis. Structured credit clearly suffered during 2008-9 and the largest structured investment vehicles that closed in this period were levered at 30-50 times the original amount. The situation is no longer that precarious, as this level of leverage no longer exists.
As a result, we believe that the ABS universe continues to offer credit investors the opportunity to seek appealing returns in the lower-for-longer environment. To find out more, watch our webinar replay.