Securitized Fixed Income: A Proven Performer in Market Downturns

Key takeaways:

• U.S. securitized fixed income has, on average, performed better than corporate bonds through the five most recent corrections and bear markets.¹ Within U.S. fixed income, only Treasuries have outperformed securitized sectors through such periods going back to 2015.
• In our view, the strong performance of securitized sectors is due to the high credit quality, low correlation to equities, and low duration within asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), and collateralized loan obligations (CLOs), while agency MBS have benefitted from their perceived status as a safe-haven asset during bouts of volatility.
• We believe an appropriate allocation to securitized sectors is critical to navigating ongoing economic uncertainty and persistent volatility in equity markets. Because securitized exposure is typically not accessible through static benchmark indices, investors may need to tactically allocate to securitized sectors to increase their exposure.

¹ A market correction is defined as a decline of 10% or more (but less than 20%) from the market’s most recent high. If the decline surpasses 20%, it is defined as a bear market.

Table 1: Peak-to-trough returns of the five most-recent equity market corrections/bear markets, with corresponding returns for various fixed income sectors over the same period

Despite some sensationalized and misleading headlines regarding securitized assets, specifically CLOs, securitized sectors responded to recent events as we would have expected: Returns were mostly flat to slightly positive when equity markets were down almost 20%. The performance of securitized fixed income through the recent market correction is broadly in line with its performance during previous bouts of volatility. This further highlights our belief that an appropriate allocation to U.S. securitized fixed income is a key component of a strategic asset allocation.

– John Kerschner

Disclaimers and sources:

² U.S. Treasuries = Bloomberg U.S. Treasuries Index, IG ABS = Bloomberg US Aggregate Asset-Backed Securities Index, Agency MBS = Bloomberg U.S. Mortgage-Backed Securities Index, IG CMBS = Bloomberg Investment Grade Commercial Mortgage-Backed Securities Index, AAA CLOs = J.P. Morgan AAA CLO Index, IG corporates = Bloomberg U.S. Corporate Bond Index, BBB CLOs = J.P. Morgan BBB CLO Index, High yield = Bloomberg U.S. Corporate High Yield Bond Index, S&P 500 = S&P 500® Index.

Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities. 

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Please note that this article reflects the author's personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.