Fixed Income - Looking beyond the familiar

Securitised Credit offers a more attractive combination of income, relative value and limited duration risk than familiar corporate bonds.

• Most securitised credit is floating rate, while its spreads stand at roughly 60–70% through their post-global financial crisis range excluding Covid, versus around the 95th percentile for corporate credit.
• The structure divides loan pools into tranches, allowing investors to choose their position between better-protected AAA or single-A senior tranches and riskier, higher-income lower tranches.
• Duration is typically around half a year or less, making the asset class a potential diversifier; allocations cited by Andrew Jackson have risen from about 10–20% of fixed-income portfolios several years ago to 20–40% today.
• The opportunity set includes CLOs, residential and commercial mortgage-backed securities and other asset-backed securities, but lower liquidity and greater analytical complexity make manager expertise and security selection important.
• HSBC Asset Management reviews the market monthly and previously favoured European CLOs over US CLOs when comparable credit risk offered about 40 basis points of additional return; the advantage later narrowed as the credit picture changed.

Takeaway: Investors willing to analyse securitised structures may find income and relative value without adding much duration, but they must accept liquidity, credit, complexity and asset-backed-securities risks and select high-quality tranches carefully.