Credit deterioration may signal a return to “normal” in structured products.
In early 2022, structured products as an asset class outperformed other fixed-income sectors, but as the year went on, credit spreads widened to the highest levels seen for most sectors since the post-pandemic tightening. Residential mortgage-backed securities (RMBS) experienced anemic supply, commercial mortgage-backed securities (CMBS) saw elevated lodging/retail delinquencies, and cracks are showing in the subprime market for unsecured consumer loans.
- In Q1, structured products saw higher interest rates, wider credit spreads, lighter trading volumes, and heightened prepay extension.
- The pace of the recent selloff in rates is not another taper tantrum, but it does bring a host of new issues: Lower trading volumes, higher funding rates, and looser underwriting standards.
New forms of tiering, such as exposure to Russian airlines, have emerged because of geopolitical events, which operates as a reminder that issues considered relatively minor can grow remarkably fast in importance.