Securitization Weekly Overview: Room to run, less margin for error

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Securitization Weekly Overview: Room to run, less margin for error

Room to run, less margin for error

Strong SP technicals persist, but selectivity matters more

Securitized products continue to benefit from one of the strongest technical backdrops

in fixed income. ABS issuance remains readily absorbed by demand, prompting BofA to

raise its 2026 ABS issuance forecast to $402bn, while non-agency RMBS spreads

tightened further and CLO BB spreads retraced to late-June tights. At the same time,

broader market sentiment has become increasingly optimistic, with cash balances falling

and investor positioning becoming more stretched across risk assets. We remain

constructive on securitized products given healthy fundamentals, stable credit

performance, and robust inflows, but believe future returns will be driven more by carry,

structure, and security selection than broad spread tightening. Within CLOs, widening

dispersion across lower-rated tranches and selected software exposures creates

opportunities for active managers to generate alpha

MBS technicals remain firm, duration opportunity emerging

Softer inflation data supported a modest rally in rates this week, though the broader

macro outlook remains contested as rates and economics teams continue to highlight

upside inflation risks and the possibility of additional Fed tightening later this year.

Against that backdrop, agency MBS remained remarkably resilient, with the basis

widening just 2bp to 112bp despite ongoing geopolitical uncertainty. Higher-coupon

mortgages continued to outperform, with FNCL 5.5s and 6.0s among the strongest-

performing coupons over the past week, reinforcing our preference for up-in-coupon

exposure. Meanwhile, primary mortgage rates rose to 6.55%, the highest level since