While overall mortgage debt has remained essentially flat, the proportion of mortgage debt that is eligible for broad fixed income indexes has increased relative to investable, but non-indexed securities, such as non-agency residential mortgage-backed securities (RMBS). At its peak, overall non-agency securitisation was near 40%, today it is approximately 10%.
The decreasing role of mortgages in indexes is further complicated by the Fed’s large role in the mortgage-backed securities (MBS) market, which effectively removed $1.8 trillion of securities from the market at its peak. The Barclays float adjusted benchmark, which excludes these securities held by the Fed, has a less than 25% weighting to securitised products.
The investable opportunity set is not only defined by index eligibility or even underlying issuance. For example, as student loans have grown from $600 billion outstanding in 2008 to approximately $1.4 trillion today, securitised student loans have fallen from $238B to $175B. This highlights the changing nature of both the consumer and the investment universe over the past decade.
Conclusions — Securitisation as a window to the consumer: the consumer is doing alright
For investors, trends in securitisation are important both for what they tell us about consumers, which drive two-thirds of the U.S. economy, and for the investable universe itself. While articles discussing high level consumer debt figures seem designed to trigger flashbacks to 2008, the comparison is inapt as the consumer today is appreciably healthier than ten years ago. “The Joneses” are less heavily levered relative to their income and their debt is more likely to be fixed rate as opposed to floating rate, though their children may have compromised future spending by borrowing for education today.
Securitisations as a percentage of broad fixed income benchmarks have declined to near their lowest levels since the indexes began. This does not reflect decreased importance of the sectors, but rather the relative modesty of consumer debt increases relative to their public and corporate counterparts. In this way, fixed income as an asset class provides a more holistic view into the economy than almost any other as fixed income investment touches the public, corporate and consumer sectors of the economy in a direct and investable way.
This rapid transition of the benchmark market over the past decade is also a reminder to investors that there is no such thing as a static index or investable universe in fixed income. The difference in risk factors between the 2008 benchmark of 45% securitised versus today’s 30% are stark. The differences including the non-benchmark eligible are even more pronounced as mortgage credit risk, once a significant factor for the overall market, is now confined to a narrow corner of the market, while the larger mortgage risk factors today relate to the timing of cash flows — prepayment and extension risks — and thus convexity.
These very trends make securitised assets a good counterbalance to other investable debt. This is not only because of its unique structures and risk factors (credit enhancement and collateral characteristics rather than business models), but also because the consumer may in fact be sporting the healthiest balance sheet among borrowers today.
While an overleveraged consumer and securitisation were at the epicenter of the past crisis, today a more modestly leveraged consumer with a better structure of debt is in a healthier position than ten years ago. Securitisations provide a unique vantage point to examine the evolution of consumers over the past decade and to consider the investment environment moving forward. We expect both the market and the underlying consumer trends to continue to evolve, potentially leaving the investable universe quite different in the future than it is today. These changes will create opportunities for investors, but also share key information about the world’s largest economy and securitised assets will remain a key component of diversified portfolios.