Fixed Income Blog

Why It May Be Time to Lean Into Securitized Assets

12 February 2025

4 min read

Monika Carlson| Managing Director, Senior Investment Strategist and Head—Income and Systematic Fixed Income Business Development

Are bond investors overlooking an attractive opportunity?

Building a bond portfolio these days isn’t easy. Interest rates have been volatile. Credit spreads are tight. And sweeping change in US fiscal, trade, and regulatory policy is underway. We think securitized assets deserve a closer look.

Mortgages and other securitized bonds may help to diversify portfolios that include a healthy mix of interest-rate and credit risk. They may also make it easier to capitalize on the policy and regulatory changes on the Trump administration’s to-do list.

Attractive—and Less Correlated—Return Potential

The short-duration nature of select mortgage debt and collateralized loan obligations (CLOs) may help to reduce correlation to other fixed-income assets, including government and investment-grade corporate debt.

This is important, because while the Federal Reserve seems likely to reduce rates again in 2025, we think the pace of easing may be slower and more uneven than might have been expected a few months ago—and rates may settle at a higher level than we’ve seen in recent cycles.

The Fed’s reticence is understandable: recent history has left policymakers and markets sensitive to any sign of rising prices. And some economists worry that lower marginal tax rates, tariffs and reduced immigration—all priorities of the new administration—could increase growth and push prices higher.

Average yields on select securitized assets are competitive with those on high-yield corporates, while their duration may be shorter. And residential mortgages in particular are exposed to US consumers at a time when household balance sheets are strong. Corporate fundamentals, while still solid, are starting to weaken.

What’s more, various types of mortgage-backed debt, including agency mortgage pass-through securities as well as credit risk transfer securities (CRTs) issued but not guaranteed by US government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, have exhibited low correlation with high-yield corporate bonds (Display, left). Meanwhile, a blend of securitized assets has also exhibited low correlation to US government debt and investment-grade corporate securities (Display, right).

Mortgages May Diversify Exposure to High Yield Corporates and Rates

MBS, CMBS, CRT correlation toHigh Yield: 0.43, 0.54, 0.63. 5-yr rolling correlation, securitized blend to US Aggregate <0.30

Historical analysis does not guarantee future results.
MBS: mortgage-backed securities; CMBS: commercial mortgage-backed securities; CRTs: credit risk-transfer securities.
Agency MBS represented by Bloomberg US MBS Index; CMBS represented by Bloomberg Investment Grade CMBS Index; CRT represented by CRTx Aggregate Index (starting Jan. 1, 2015). Blend of securitized indices used to represent mortgage assets includes the following: Agency MBS represented by ICE of BofA US Conventional 30-Year Mortgage-Backed Securities Index (10% weight), CRTs represented by Mark Fontanilla CRTx Index (35% weight), Legacy RMBS represented by J.P. Morgan legacy RMBS Index (10% weight), CMBS represented by ICE BofA AA-BBB US Fixed Rate CMBS Index (15% weight) Collateralized Loan Obligation (CLO) AAA-AA represented by JPM CLO AAA-AA index (15% weight), and CLO A-BBB represented by JPM CLO A-BBB (15% weight).
As of December 31, 2024
Source: Bloomberg, JP Morgan and Mark Fontanilla & Co.

Securitized Assets Offer an Alternative to Cash

With the Fed now in easing mode, cash has lost some of its luster. We think securitized assets may be a good substitute for investors who want to reduce sizable cash holdings that many investors began building up in 2022 when short-term interest rates soared. By the end of 2024, money market fund assets had surged to nearly $7 billion.

For those still on the fence, it may be interesting to learn that a diverse blend of securitized indices returned 23.3% between October 2022 and December 2024. The Bloomberg 1-3 Month Treasury Bill Index—a common proxy for cash—delivered 11.7% over the same period (Display).

Sitting on Too Much Cash May Be Costly

Line shows cash holdings spiked 2022-24. But bars show 11.7% cash return vs. 23.3% return blend of securitized indices.

Historical analysis does not guarantee future results.
Blend of securitized indices used to represent securitized assets includes the following: Agency MBS represented by ICE BofA US Conventional 30-Year Mortgage-Backed Securities Index (10% weight), CRT represented by by Mark Fontanilla CRTx Aggregate Index (35% weight), Legacy RMBS represented by JPM Legacy RMBS Index (10% weight), CMBS represented by ICE BofA AA-BBB US Fixed Rate CMBS Index (15% weight), CLO AAA-AA represented by JPM CLO AAA-AA index (15% weight), and CLO A-BBB represented by JPM CLO A-BBB (15% weight). Short-term T-bill represented by Bloomberg Short-Term 1–3 Month Index.
As of December 31, 2024
Source: Bloomberg, ICE Data Indices, J.P. Morgan and Mark Fontanilla & Co.

A Way to Capitalize on Deregulation

We think the Trump administration is likely to put its weight behind a less stringent regulatory framework. The Fed has already outlined plans to ease the capital requirements to which US banks were originally committed in the Basel III regulations, the latest proposal in a set of international banking rules designed to ensure that banks have sufficient capital and liquidity to withstand shocks and maintain financial system stability.

Less punitive rules would leave US banks with more capital to invest, and we believe a healthy share may find its way to high-quality securitized assets.

Potential GSE reform may also be on the table. While privatization of Fannie Mae and Freddie Mac—long a priority for Donald Trump’s Republican party—would likely take years, we wouldn’t be surprised to see the agencies begin building up capital ahead of a potential exit from conservatorship. If that happens, we expect CRT issuance to decline, potentially benefiting valuations.

Determining the Right Mix of Securitized Assets

So how might it all work in practice? Between April 1, 2020—shortly after the start of the COVID-19 pandemic—until the end of 2024, combining exposure to the Bloomberg US Aggregate Bond Index and a blend of securitized indices would have increased return while reducing volatility (Display, left). Substituting the Bloomberg US Corporate High Yield Index for the Aggregate (Display, right) would have produced a similar result.

The precise nature of such a blend will vary based on individual objective, risk tolerance and other factors. But we think a dynamic approach to all three assets is worth considering.

Securitized Assets May Change Risk/Return Profiles

Graphs show higher potential return, lower standard deviation as securitized added to core and high yield allocations.

Historical analysis does not guarantee future results.
Blend of securitized indices used to represent mortgage assets includes the following: Agency MBS represented by ICE BofA US Conventional 30-Year Mortgage-Backed Securities Index (10% weight), credit risk-transfer securities represented by Mark Fontanilla & Co. CRTx Aggregate Index (35% weight), legacy RMBS represented by JPM Legacy RMBS Index (10% weight), CMBS by ICE BofA AA-BBB US Fixed Rate CMBS Index (15% weight), CLO AAA-AA by JPM CLO AAA-AA index (15% weight), and CLO A-BBB by JPM CLO A-BBB (15% weight). US Agg represented by Bloomberg US Aggregate Bond Index. US HY represented by the Bloomberg US Corporate High Yield Index. Based on monthly returns from April 2020 through December 2024. No representation is being made that any account will or is likely to achieve returns or a volatility profile similar to those being shown.
As of December 31, 2024
Source: Bloomberg, ICE Data Indices, J.P. Morgan and Mark Fontanilla & Co.

Investors today have plenty to think about. The path of growth and inflation are not crystal clear, and the potential for significant policy changes adds new wrinkles to the outlook. But in our view, these conditions make it a good time for investors to review their strategies. The way we see it, investors who are underweight securitized assets today may be missing out on attractive diversification and return potential.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Monika Carlson

Monika Carlson is a Managing Director, Senior Investment Strategist, and Head of the Income and Systematic platforms for the Fixed Income Business Development team. She is responsible for leading a team of investment strategists and product managers and for driving growth efforts on AB’s fixed-income platform. Additionally, as part of her client-facing role, Carlson represents AB’s market views and portfolio strategies to clients, prospects and consultants globally. She has held several roles at AB, including as the head of the Global Offshore Retail Platform in Product Management. Prior to joining AB in 2007, Carlson worked at Neuberger Berman. She holds a BBA in finance from Baruch College at the City University of New York and is a CFA charterholder. Location: New York