Aussie mortgages grow appealing with supportive conditions
Perpetual’s head of fixed income, Vivek Prabhu, has highlighted Australian mortgages as a potential bright spot for investments.
Residential mortgage-backed securities (RMBS) present an opportunity to capture returns from Australians’ love for property without lending directly to individual borrowers, Prabhu observed, and meet his definition of a high-quality asset.
“I’m rotating into the high-quality end of the spectrum at this part of the credit and economic cycle. That’s where you’re currently being paid for risk,” he said.
“You’re not being paid enough for taking risks at the riskier end of the spectrum.
“RMBS have a very good track record in terms of performing. Even during the GFC and the pandemic, there weren’t any losses on Aussie-rated RMBS.”
He signalled supportive conditions for RMBS at present and noted they hold a “very good” performance history.
“People are able to service their mortgages because unemployment is very low, and interest rates are close to the peak of the cycle and likely to fall next year,” Prabhu said.
Additionally, “unusually strong” property prices, bolstered by high immigration, are also supporting this investment case, he added.
“That means the collateral backing for these bonds, in terms of home owners’ equity, is supportive as well.”
RMBS are offering better risk-return than US fixed income, which Prabhu believes is looking expensive, and that the market is overlooking risks caused by US election uncertainty and the potential for inflationary policies.
The election outcome will determine the path of credit markets for the next month with big spending policies likely if there is a Democrat victory, whereas a Republican one would be inflationary with tax cuts and tariffs.
“I haven’t held any US banks in the portfolio for about 18 months now. That is not driven by any concerns around credit fundamentals – it’s just that I’m finding better risk-return propositions elsewhere.”
Ultimately, he urged investors not to get too caught up in short-term bond market gyrations, which has seen “wild swings” gain traction.
“These gyrations are typical during inflexion points in the interest rate cycle,” he maintained.
“They provide opportunities for active managers like us to generate return as yields move from one extreme to the other, while markets try to price the ultimate speed and magnitude of the rate-cutting cycle.”
AUTHOR
Rhea Nath
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