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Securitized Credit – Short on Duration, Long on Relative Value

Accent - Houses

When focusing on the short end of the yield curve, both historically and today, securitized credit offers a yield advantage relative to comparably rated bonds. As a component of an investor’s portfolio, securitized credit provides diversification from corporate bonds through direct exposure to the U.S. consumer who accounts for 70% of all economic activity. The strength of the consumer and pent up demand in the current environment is well-documented. As a result of the massive stimulus packages in response to the COVID-19 pandemic, household savings have increased rapidly while debt service ratios have reached record lows. Further, historically low mortgage rates continue to create strong demand for residential real estate. The relative value of securitized assets to corporate investment grade bonds is evident in the latter’s lower yields and approximate duration of 8.5 years. With inflation fears and interest rate risk hanging over financial markets, the rationale for short-duration securitized credit is compelling especially when considering the lack of yield opportunities in this environment.

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