ABS and CMBS: The Reopening Impact | Lord Abbett

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Fixed-Income Insights

Lord Abbett Portfolio Manager Adam Castle discusses the implications of a potential pickup in U.S. growth for structured products markets. 


Good morning, my name is Adam Castle. I’m a portfolio manager focusing on securitized products here at Lord Abbett.

Interstitial: Economic and Market Backdrop

Right now, it's a very interesting time; there's immense optimism in the markets. We are well on our way to rolling out a vaccine which is picking up steam domestically. The case count for COVID-19 is declining every day. And we are starting to see jobs come back. In addition to that, the Fed has been remarkably quick to act over the last year and they've expanded their balance sheet to an unprecedented level—really, in our lifetimes and not seen since the Great Depression.

And on top of it all we just have experienced another stimulus bill sizing up to $1.9 trillion that has been pretty front-loaded. We're expecting it to have a very meaningful impact in 2021 and probably early next year on the lower income segments of U.S. households, which should be very meaningful for getting this economy restarted.

Despite all of this, you know, great progress that we're seeing fundamentally and the accommodation from monetary policy, the markets have had a pretty challenging month. [B-ROLL: Financial market images.] There's been an immense rotation within asset classes to adjust to this set of circumstances. And we're positioning for this rotation to continue.

So what am I really talking about? There's been a huge move from high quality assets and Treasuries out to deeper credit to deeper value things that are more levered to the economic reopening. This has led to an increase in interest rates, and generally things that are very high quality and had been very tight in spread and have fallen slightly out of favor.

So, as we think about what that means, if you consider all of the circumstances in play, manufacturing PMIs are at a post GFC peak. Alternative data that we've tracked suggests that we are approaching an inflection point in employment. It's likely that in the official data unemployment takes a meaningful pick-up over the next month. And when you consider the size of stimulus, it's really no wonder that the markets are getting concerned about inflation. We're starting to see interest rates, not only have they started to increase out the curve, but even in the intermediate part of the yield curve, we are seeing pressure, and we expect that to continue in the near term.

Interstitial: ABS/CMBS: The Current Environment

So regarding securitized products, specifically the rotations that are occurring, we expect that to pervade into the securitized markets. One thing that we are positioning for is for strength in commercial mortgage backed securities and CLOs, and in consumer asset backed securities. While at the same time we're expecting the momentum positive momentum in residential mortgage backed securities to slow down. If you think about what was really a winner during the pandemic, it was the U.S. housing market. Home prices are at extremely high levels, the demand for housing is elevated and the supply is depressed. All the while, [mortgage] underwriting standards have been pretty tight. What that's led to is an incredible outperformance in residential mortgage backed securities.

And we think that momentum, there will be in favor of sectors that are more leveraged to the return of normalcy. Whether that's consumer loan securities, such as auto, student, or credit card loan or commercial mortgage backed securities and collateralized loan obligations.

Within each asset class in securitized we're also expecting there to be credit curve compression. This week we began to see under performance of AAA and AA [rated] tranches while seeing outperformance of non-investment grade and lower-rated mezzanine tranches, further reflecting this this view of reflation and of [investors’] optimism and desire to reduce duration and reduce interest rate risk while maintaining credit risk.

Thank you very much for listening and thank you for your continued interest in Lord Abbett.


Asset-backed securities (ABS) are collateralized by a pool of assets such as loans, leases, credit card debt, royalties or receivables. An ABS is similar to a mortgage-backed security, except that the underlying securities are not mortgage-based.

Collateralized loan obligations (CLOs) are a form of securitization where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches. A CLO is a type of collateralized debt obligation.

Commercial mortgage-backed securities (CMBS) are secured by mortgages on commercial properties rather than residential real estate. The underlying loans that are securitized into CMBS include those for properties such as apartment buildings and complexes, factories, hotels, office buildings, office parks, and shopping malls.

Securitized products are pools of financial assets that are brought together to create a new security, which is then divided and sold to investors.

Tranches are segments created from a pool of securities—usually debt instruments such as bonds or mortgages—that are divvied up by risk, time to maturity, or other characteristics in order to be marketable to different investors.

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results.

The credit quality of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This broadcast may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This broadcast serves as reference material and is provided for general educational purposes only; does not constitute an offer to acquire, solicitation for an offer to acquire, an offer to sell or solicitation for an offer to buy, any securities, nor is intended to be relied upon as a forecast, research, or investment advice on any securities, and cannot be used for any of the foregoing.

The views and opinions expressed by the Lord Abbett speaker are those of the speaker as of the date of the broadcast, and do not necessarily represent the views of the firm as a whole.

Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Neither Lord Abbett nor the Lord Abbett speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Please consult your investment professional for additional information concerning your specific situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

This broadcast is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved. This recording may not be reproduced in whole or in part or any form without the permission of Lord Abbett. Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.




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