Is Securitized Debt a Better Option Than Corporate Bonds?

As inflationary pressures continue, getting fixed income via bonds can become tricky to navigate, but there’s another option—securitized debt.

“Rising inflation in the U.S. could end up being much better for consumers than for companies, so investors should be rotating out of corporate bonds and into asset-backed securities and other securitized debt, according to strategists at Goldman Sachs Group Inc,” a Bloomberg article noted.

Goldman strategists noted that corporate profits could take a hit in 2022. In addition, real estate could get more expensive, translating into bigger loans for prospective home buyers—a plus for investors of mortgage-backed securities (MBS).

“Supply-chain disruptions are likely to limit corporate profits next year, which could hurt company debt, while pushing home and car prices higher, helping securities backed by those assets,” Bloomberg added. “Meanwhile wage inflation pressure that many companies are seeing will weigh on corporate profit while helping consumers, wrote Goldman Sachs strategists led by Marty Young and Lotfi Karoui.”

Getting Securitized Debt Exposure With VMBS

As mentioned, one way to get securitized debt exposure is via MBS. This can be had with an ETF wrapper through the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS).

VMBS seeks to track the performance of a market-weighted mortgage-backed securities index, which is designed to track the performance of the Bloomberg U.S. MBS Float Adjusted Index, which covers U.S. agency mortgage-backed pass-through securities.

To be included in the index, pool aggregates must have at least $250 million currently outstanding and a weighted average maturity of at least one year. All of the fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

Even if the Fed decides to tighten up monetary policy and raise rates in 2022, VMBS can also rise in tandem since it derives its income from higher rates in mortgages. With debt holdings backed by the government, VMBS gives fixed income investors that extra layer of security.

Highlights of VMBS:

  • Seeks to provide a moderate and sustainable level of current income.
  • Invests primarily in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
  • Moderate interest rate risk, with a dollar-weighted average maturity of three to 10 years.

For more news, information, and strategy, visit the Fixed Income Channel.