Allocators Will Go for Structured Debt Linked to Property, Poll Says

Institutional investors in the U.S. and Europe will favor structured credit instruments focused on residential and commercial real estate over the next 18 months, according to an allocator survey by Aeon Investments, a major issuer of these products.

There has been a pullback recently in issuance of mortgage-backed securities, the largest structured credit product, as the Federal Reserve and other central banks have jacked up interest rates to fight surging inflation. Another headwind for MBS is that the Fed has stopped buying mortgage bonds issued by agencies and is letting them roll off.

But some fixed-income analysts anticipate that those hikes could come to an end next year, and even reverse. Vanguard fixed-income analysts indicated that a turnaround for these bonds is coming. They wrote in a report about mortgage and other asset-backed paper that “fundamentals improved as rates of delinquency and losses declined.”

Another attractive feature is the relatively high yields these bonds offer. Fixed-rate MBS now yield an average 3.9%, per Bloomberg data. That’s 0.6 percentage point higher than benchmark 10-year Treasury bonds.

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In the Aeon survey, 63% of respondents said they expect greater institutional buying of securities backed with debt on residential and commercial properties. And 49% said they anticipate more allocator inflow into consumer credit such as student loans, auto credit and leases, compared with 11% who said they foresee a decline.

Institutional investors in Europe and the U.S. have around $574 billion in assets under management in structured credit products.