COMMENTAR Y
reshaping the credit box to provide fi nancing to creditworthy borrowers who were left out by the restrictive QM regulations, such as a debt-to-income ratios of 43% or less. In September, Loan Star issued a $72 million transaction that stands as the fi rst transaction secured primarily by non-QM loans. The M1 tranche of that transaction has 6% of credit support and bears a 6.8% coupon. We expect more deals like this to price, offering potentially attractive investments in the credit space that can be exploited opportunistically.
CMBS While there are pockets of opportunity in the legacy CMBS market, most securities are priced to optimistic scenarios. Legacy CMBS bonds are also running off quickly as we navigate the 2015 – 2017 maturity wave. Going forward, CMBS 2.0/3.0 will likely provide tactical and strategic opportunities to investors who are able to discern between the various loan pools. In-depth analysis is key to security selection for fi nding misunderstood pools that may not be priced to optimistic scenarios. CMBX tranches also provide investors with a liquid means of expressing positive or negative views in this sector. At present, the BBB tranches look attractive after suffering during the global rout in August and September. The 2.0 BBBs trade at spreads in the mid-300s over swaps with average lives of 6 to 7 years. New issue 3.0 BBBs carry more spread duration with WALs of 9 to 10 years, but trade with spreads closer to 500bp over swaps. At current levels, these securities yield 5 to 7% and offer good carry with fi xed rate coupons. As we pass through the 2015-2017 maturity wave, loan demand and issuance will begin to taper, resulting in technicals that are supportive to spreads. The present situation in CMBS may be prime for investment managers with cash holdings and deep knowledge of the space to opportunistically navigate the coming quarters. Overall, the potential opportunities in mortgage credit make this investment space interesting for early adopters equipped with the expertise and cash on hand to take advantage of what’s next.
SUMMARY As fi xed-income investors consider liquidity risk and changes in the Fed’s zero interest rate policy, the need for investment strategies that are liquid and market- neutral becomes clear. This series examines sources of alpha and interest-rate-neutral trading strategies within the context of a multi-strategy fi xed-income portfolio. The Tradex Relative Value Fund manages such a strategy, where it seeks to capitalise on opportunities in prepayment arbitrage, relative value pass-through trading, and opportunistic structured credit. We believe our multi-strategy approach will provide investors with alpha generation as well as liquid positions that are market-neutral and can deliver strong risk-adjusted returns. THFJ
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