Views From The Experts
Toby Giordano
Portfolio Manager
Braddock Financial
Garrett Tripp
Senior Portfolio Manager
Braddock Financial
An Opportunity To Smooth The Transition To Higher Interest Rates
Last month, Janet Yellen and the Federal Reserve Board reminded the market that they plan to continue to manage toward higher interest rates. Shrugging off the threat of slowing growth due to political uncertainty and a wave of recent natural disasters, the Fed indicated four potential increases to the Fed funds rate by the end of 2018 and two more to reach long term equilibrium.
The continued rise in rates should cause traditional fixed income products with fixed coupon rates to fail to meet investment return targets desired by investors.
We believe an allocation to a Residential Mortgage Backed Securities (RMBS) and Asset Backed Securities (ABS) fund that focuses on positions in floating rate debt may reduce the negative effects of this transition. Adjustable coupons mitigate the traditional inverse relationship between interest rates and bond prices.
By making an allocation to RMBS and ABS with floating rate coupons, an investor can add credit exposure to the U.S housing and consumer sectors. We believe this to be a wise choice. U.S. home prices are 5% higher than the historical peak, but when adjusted for inflation they remain below the historical peak by 13%*. Today’s housing market is characterized by a lack of supply, while on the demand side the nation has added six million households since the financial crisis. Our experience indicates that this supply/ demand imbalance will limit the downside risk to home prices. Additionally, we are attracted to a U.S. consumer that has a historically low debt burden.
RMBS and ABS products are not a new segment of the fixed income markets and are often significant allocations to total return funds. Historically, these products tended to be primarily available to institutional investors. It is good news and good timing that mutual funds, like ours, have created the opportunity for individual investors to invest directly today.
*Using the Case Schiller Home Price Index.
Braddock Financial, LLC is a structured credit asset manager focusing on asset-backed securities and was founded in 1994. Braddock believes that asset-backed securities classes provide a rare opportunity to build and manage investment portfolios resulting
in outstanding risk-adjusted returns. Braddock’s strength in security selection comes from deep fundamental knowledge of the sector and from proprietary loan level research, along with significant trading experience. In addition, Braddock manages Funds and customized separate accounts for institutions and high net worth individuals.