07 Jan White Paper – A Closer Look at Credit Risk Transfer Securities
By Voya Investment Management
Fixed income investors have to navigate an evolving but ostensibly challenging landscape. For investors seeking exposure to residential mortgage credit, this challenge is even more pronounced. Although the Bloomberg Barclays Aggregate Index has a sizeable exposure to agency-backed residential mortgages, other securitised sectors are underrepresented. Due to the nature of the agency guaranty in agency RMBS, there is little to no exposure to the credit component. As a result, interest-rate risk is the dominant driver of return for agency-backed residential mortgages.
In this Market Insights Series, we explain how investors can benefit from other areas of the securitised market. This paper focuses on Credit Risk Transfer (CRT), a relatively new and growing market segment that provides investors seemingly elusive access to mortgage credit exposure. CRT securities are floating-rate instruments that deliver minimal duration risk, credit spreads in excess of many fixed income sectors and, ultimately, the potential to increase risk-adjusted returns across a wide range of economic scenarios. In this paper, we explore the structure of CRT securities and the market characteristics that are making them attractive investment opportunities in the current environment.