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by  BlueBay Fixed Income team, T.Mowl, L.Best Apr 24, 2023

Recent events in markets have highlighted that having a margin of safety is crucial, especially in an environment where central banks have been aggressively raising rates and are yet to achieve control on inflation.

The continued pressure on consumers and corporates in addition to the pullback in credit availability has increased recessionary risks, ultimately leading to higher expectations of idiosyncratic deterioration and defaults. Investment Grade Securitized Credit offers investors protection from defaults alongside exceptional value.

Below we highlight five reasons for an allocation to Investment Grade Securitized Credit.

  1. Protection against defaults: with continuing strain being placed on the real economy by higher interest rates, Securitized Credit offers default protection to investors - High Grade/Investment Grade rated bonds have the highest level of default protection and are significantly remote from default risk.
  2. Attractive value: credit spreads are currently at wide levels across much of the Securitized Credit market on an absolute basis versus long-term averages, and on a relative basis versus similar or lower-rated Corporates.
  3. Take advantage of higher cash rates and an inverted yield curve: in a world where cash rates are high and investors are looking for “cash plus” products, Investment Grade Securitized Credit presents a compelling opportunity given much of the market is floating rate. Bonds in this space pay coupons above the front end of the yield curve which given the inverted yield curve and wider credit spreads is boosting all in yields.
  4. Technicals driving valuations: while macro volatility in 2022 added to spread moves, levels are predominantly driven by technical factors, such as persistent primary supply and heavy secondary trading volume.
  5. Lower sensitivity to credit moves: Securitized Credit typically offers shorter spread duration versus Corporates, as demonstrated in the table below. This shorter spread duration means lower sensitivity to credit volatility and importantly, alongside the higher yields, means breakevens are higher.

Asset class by rating, yield and spread duration

Asset class by rating, yield and spread duration

Source: RBC BlueBay representative accounts for High Grade and Investment Grade Securitized Credit, as at 1 March 2023. Corporates - AA index ER20, A index - ER30.

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