Securitized Credit Market Update

• Fed: While it was just ~3 weeks ago, I can barely remember their January meeting (was the 29th)! In last month’s talking points, we called out their December meeting as being even more consequential to our markets than the new presidency… and now they have faded amongst an array for ‘Macro Inputs’ and their impact on valuations. Without a new dot plot, no dissents and key components generally in line with market expectations… a constructive yawn.
  • While our markets would have preferred a more dovish tone, a continuation of the ‘higher for longer’ policy rate narrative is positive for yields, in particular floating rate and short duration parts of securitized (CLOs, CRT, ABS).
• US Labor and CPI: Payrolls and CPI both surprised markets with stronger results, temporarily pushing treasury rates higher by furthering the case for the Fed to stay on pause (“higher for longer”). While the headline payroll # disappointed (+143K vs +175k expected), the unemployment rate shaved off -0.1% (now is at 4.0%) and wages showed some upward pressure, +0.5% MoM and +4.1% YoY. CPI was particularly spicy, with the headline and core both posting upside surprises: headline +0.5% MoM vs +0.3% expected and core +0.4% vs +0.3% expected. In each case, the reports triggered a sell-off in rate markets (UST 10yr +6bps on 2/7 and +9bps on 2/12), which has ultimately proved short-lived. The UST 10yr rate is lower MTD (-3bps to 4.51%).
  • While we could have done without the rate vol, we liked the payroll report across securitized sectors, owing to the fundamental implications for collateral pools backed by US consumers (see ABS and RMBS). Upside surprises to inflation, conversely, were not good for market sentiment. While agency markets were hurt, credit markets didn’t budge on this print, seemingly content to buy the associated higher yields absent any readily visible implications for credit risk.
• DeepSeek: A new and temporary add to our list of ‘macro inputs’, the late January announcement of the Chinese company’s AI reasoning model created temporary chaos in US equity markets. While scars in US markets remain (mainly in equity markets), volatility subsided quite quickly, and index level valuations have ultimately recovered close to cycle highs
  • Perhaps predictably, outside of a brief 3-4 hour window that Monday morning when offer sides weakened, resulting volatility in securitized markets was limited. Of note, the response in credit spreads for data center ABS and CMBS was interesting. While overall trading was limited, there happened to be a new issue CMBS deal backed by data centers in the market when the DeepSeek ‘news’ broke. Reach out if you’d like more detail, but the syndicate leading the deal widened spreads for the senior class by 15bps, class Bs (AA rated) 10bps and all other subs by 5bps, in compensation for the volatility and perceived uncertainty around the DeepSeek news. Fast forward to today and the bid side is in generally line with pricing, and another data center deal structured as a CMBS is in the market, undeterred by the vol and on its way to successfully pricing.
• Tariff Sheriff: Detailing the various related tariff moves by the new administration could de-rail my talking points. So, I’ll summarize the collective impact as having an initial volatility inducing effect but little follow-thru as subsequent announcements get discounted within markets.
  • Securitized markets have shown similarly little regard for any fundamental impact arising from new tariff policies. Ultimate inflationary and/or growth impacts may be in the offing, but our markets have been content to view them as uncertain, taking longer to play out and having an indirect impact on collateral pools across sectors.

• As is mostly evidenced in the spreads table, securitized markets have traded tighter since our last update. While the first couple of weeks of the year spread tightening was broad based across seniors and subs, as the rally has continued it has been sharpest in subordinate classes. In fact, senior parts of ABS, CRT and CMBS have seen pockets of spread widening, adding further to the credit curve flattening within securitized credit this past month.
• This credit curve flattening reflects the overall constructive backdrop for economic growth, despite the previously detailed intensity of new macro information having to be processed daily by market participants.
• For now, it seems that more spread focused buyers (likely money managers) at the top of the capital structure are less aggressive in ramping allocations in securitized credit at these spread levels. Meanwhile, yield and spread hungry buyers (likely a mix of money managers, insurers and fast money) are content to take more credit risk into the still supportive fundamental backdrop.

• Issuance has “felt” heavier than what it has totaled to so far this year. Perhaps it is owing to the shorter holiday break than normal, which kept primary markets open later into year end and open earlier to start 2025. In any case, we do not extrapolate this lower issuance further into 2025… as was the case mid-month last year, deal pipelines are large across sectors, and we expect meaningful volumes to add to the tally and do so on a sustained basis.

• Looking forward, we note the market’s resilience in the face of a significant amounts of new information, consumed seemingly daily. The pacing has been intense, and new fronts (Russia/Ukraine talks, DOGE inspired deregulation) continue to open with fresh developments on a day-to-day basis.
• In this environment, focus is a challenge but ultimately is key. Much of the news has minimal near or even long-term direct impact on securitized markets, even if unsettling on the macro scene. • Our more traditional pillars for investing (collateral, structure, parties involved, rel-val) continue to reflect supportively as we progress through the year, so it is important to not miss opportunities as they arise in both primary and secondary markets.
• Lastly, we prepare ourselves for next week’s securitized industry conference. Easily the largest industry gathering of the year, we will assuredly return with detailed color and ‘hot takes’ from all corners of the market and will be pleased to share it with you all. 

Voya Securitized Team