As inflationary pressures continue, it may become difficult to obtain fixed income through bonds, but there is another option: securitized debt.
“Rising inflation in the United States could end up being much better for consumers than for businesses, so investors should turn away from corporate bonds and into asset-backed securities and securities. ‘other securitized debt, according to strategists at Goldman Sachs Group Inc’, a Bloomberg Article Noted.
Goldman strategists noted that corporate earnings could suffer in 2022. In addition, real estate could become more expensive, which would translate into larger loans for potential home buyers, a benefit for investors in mortgage-backed securities (MBS).
“Supply chain disruptions are likely to limit corporate earnings next year, which could hurt corporate debt, while pushing up house and car prices, helping asset-backed securities assets,” Bloomberg added. “Meanwhile, the pressure of wage inflation that many companies are seeing will weigh on corporate profits while helping consumers, wrote Goldman Sachs strategists led by Marty Young and Lotfi Karoui.”
Gain exposure to securitized debt with VMBS
As mentioned, one way to gain exposure to securitized debt is through MBS. This can be achieved with an ETF wrapper via 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 US MBS Float Adjusted Index, which covers pass-through mortgage-backed securities US agency mortgages.
To be included in the index, aggregates in the pool 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 monetary policy and raise rates in 2022, VMBS may also rise in tandem since it earns its income from rising mortgage rates. With government-backed debt securities, VMBS offers fixed income investors an additional layer of security.
Highlights of VMBS:
- Seeks to provide a moderate and sustainable level of current income.
- Invests primarily in US agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).
- Moderate interest rate risk, with an average dollar-weighted maturity of 3 to 10 years.
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