Failures in the banking system this year have not seemed to affect the securitized fixed income market, but last year’s market conditions may have created investment opportunities. Kerschner believes that while the Fed has likely made its last move to increase the Federal Funds rate, the Fed is unlikely to be cutting rates until 2024, more slowly than the market expects.
Securitized products, including asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), sold off last year as the Fed was tightening rates. The ABS and CMBS markets are offering high interest rates and wide credit spreads that could make for attractive investments. Kerschner notes that once it is clear that the Fed has reached an interest rate plateau, fixed income volatility is likely to decline which could lead to tightening credit spreads.
Residential mortgages issued before and during COVID may become less risky over time, as home price appreciation has reduced effective loan-to-value ratios. Commercial mortgages are trickier, but the office sector is not going away, especially when people return to work or repurpose the office buildings for housing.