Macro Markets Podcast Episode 59: Finding Value Now in ABS, MBS, and CLOs (Plus Listener Mail)
Karthik Narayanan, Head of Structured Credit, joins Macro Markets to discuss what makes the sector an important component of our actively managed fixed-income portfolios and where we are finding value now.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody. And welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I'm Jay Diamond, head of thought leadership for Guggenheim Investments, and I'll be hosting today. Now, before we begin, I want to thank our listeners for tuning in and remind you that if you have any questions for our podcast guests, please email us at MacroMarkets@Guggenheiminvestments.com, and we will answer your questions for you. In fact, today we have some listener mail to answer. So please stick around to listen to that. Okay. The Fed appears on track to achieve a rare soft landing, but the risk of a sharper slowdown remains palpable. Meanwhile, the market continues to assess a number of uncertainties out there: how the election may play out, what the fed might do at its next meeting and subsequent ones, and whether the spiking geopolitical risks will stay elevated. For us, these conditions lead us to do what we always do, which is to seek relative value opportunities across the fixed income universe. And we have found that these opportunities often come in the structured credit market. So here to discuss why and where we see attractive opportunities in this sector is Karthik Narayanan, head of the Structured Credit Group for Guggenheim Investments. Karthik, welcome back and thanks again for taking the time to chat with us today.
Karthik Narayanan: Good morning, Jay, and thanks very much for having me back.
Jay Diamond: Now let's get started. Karthik, for our newer listeners, who might not be familiar, please briefly describe what structured credit is and the different sectors that are within this asset class.
Karthik Narayanan: Sure. So structured credit is a fixed-income credit sector. So that doesn't carry any government guarantees and there is credit risk and returns that are commensurate with taking that additional risk. But at its core structured credit is really a secured form of lending. So, there is collateral and then there’s a loan made on that collateral and securities form typically. And that comprises the backbone of structured credit. And to be a little bit more specific, structured credit whether it's the four main sectors that we're talking about today which is ABS: asset backed securities, CLO: collateralized loan obligations, RMBS: residential mortgage-backed securities, or CMBS: commercial mortgage-backed securities. All of them are debt instruments secured by first contractual cash flows and second, assets. And so that two layer of collateral is really the security that is underpinning that term secured debt. And so really, it's a form of secured debt, standardized terms that's backed by both cash flows and assets.
Jay Diamond: Why does our firm like to include structured credit in our portfolios?
Karthik Narayanan: There are a couple of primary reasons that I think are important to consider. The first one is there's an opportunity for excess income in this sector. So, as your listeners know, structured credit tends to be complicated. There's lots of acronyms. There's lots of the details about the different types of assets in the market. As well as the terms of the financing. There are rules about payments, a wide diversity of asset types, and then what we call waterfall or payment priorities that need to be modeled out to analyze these deals or even price up bonds or distress them. And all this work is not done for free. It takes a lot of infrastructure and brain cells to do, and institutional knowhow. And it also poses a barrier to entry or a barrier to access to these markets. As a result of all these complexities and diversity, there are fewer investors in this market than you would see in liquid credit markets, such as investment grade corporate credit. So, for this complexity, investors have demanded a premium. Now this premium can vary through time and that will change the attractiveness of the sector. But we found that this premium has been pretty persistent in being a positive non-zero number and sometimes very meaningful through time. And that's point one of why structured credit has been a big focus for us over the, you know, 20 odd years that we've been doing this at Guggenheim. The second point is that structured credit tends to be shorter in maturity than other liquid credit markets. And with a lower maturity or a lower duration, there's a potential for lower volatility. So, when we're talking about structured credit, any of these sectors that I mentioned a moment ago, ABS, CLOs, etc., the vast majority of the market tends to cluster in the 3 to 7 year average maturity zone. And you contrast that with, say, the Bloomberg investment grade corporate index where the maturity is north of ten years. I think it's 10.7 at the time of this recording. So there is more potential market exposure from that longer duration. So that's point number two is in terms of market potential market volatility. Third point I'd say and I think this is the one we spend the most time on here is that there are a number of structural protections and enhancements that are offered in structured credit. So as I mentioned before this is a secured form of debt. So first off there is collateral that is in contrast with unsecured debt, which is again common in the corporate bond market. And in structured credit there are forms of enhancement such as one overcollateralization, which is a fancy way of saying that there are more assets contributing to the ABS than there is ABS debt. So there's a cushion of assets. There's something we called excess spread, which is a term that is, you know, a fancy way of saying that there's more income coming into the ABS deal, than there is going out to pay the interest on the ABS. So there's extra cash floating around and that can be used to absorb losses or to redirect towards paying down senior bonds more quickly and getting them out of the way if things are not going well in terms of credit performance. And all these translate into the punch line, which is that historically default rates and ABS for a given letter rating have been lower than they have been in corporate bond land. Then the last point I'd say about why structured credit has been interesting for us here at Guggenheim for two plus decades at this point, is about a point I made earlier, which is there's a lot of fragmentation and structured credit. The assets are diverse. They're very different. So if we just take the example of asset backed securities, you could come in on a Tuesday as an analyst and sit down at your desk and be reviewing a deal backed by leases on cell towers. You know, the analyst sitting next to you could come in on a given Wednesday and be analyzing auto loans. These things are driven by very different macro-economic factors, and it creates an element of credit diversity. So really that diversity is the fourth point I'd make about why this sector has been appealing to us. So just, you know, to recap 1) excess yield that tends to arise out of difficulty of investors accessing the market 2) lower maturity, which tends to lower the mark to market volatility potential for that asset class 3) three structural protections and bondholder protections, which translate into lower default rates and 4) credit diversity.
Jay Diamond: Great. Two follow ups on those four points that you made. On duration, you mentioned, the shorter maturity of asset-backed securities, but isn't it also the fact that certain asset-backed securities also come in floating rate form, which will also result in a shorter duration?
Karthik Narayanan: That's true Jay. It's a great point. So, you know, if you think of structured credit overall it tends to tilt more towards fixed rate. But there's a large floating rate part of the market too. And in fact, the CLO market, which is $1 trillion market is almost all floating rate. So that further reduces the price volatility of the bonds, because with a floating rate instrument, the duration is very short. It's at a maximum. It's the time until the next coupon reset, which in the case of CLOs is three months. So the exposure to interest rates from a price standpoint is very low and it's only credit spreads that are going to affect the price volatility. So that further enhances the point of the lower market to market volatility potential.
Jay Diamond: And as far as diversity goes you described there's cell towers and auto leases and credit cards. And there's that diversity. But there's also diversity within each of those categories based on the number of assets within the pool. Isn't that correct?
Karthik Narayanan: That's right. So, there's the inter deal diversity and there's the intra deal diversity. So your point is on the latter. You know if you have, say, auto loans, there's a lot of different autos on which there are loans in that deal. They are held by thousands—tens of thousands on a given deal—of borrowers that are scattered all over the country. That has a lot, all in different individual situations. That's one form of diversity. And even if you get into the ABS sector, you have cell towers. They're on lease to the major telecom carriers, they're distributed all over the country. There are lots of dimensions of diversity within the deal, too. And you know, the best example, frankly, is CLOs where you have corporate obligations that are scattered all over the economy, that are, you know, the entire cross section of what's present in the bank loan market. And that could be health care and software and professional services and all the way down the line. So there's industry diversity. There's geographic diversity, there's obligor diversity. So those are great points as well.
Jay Diamond: Now let's dive into current market conditions and opportunities. So, we've got the Fed is in the process of easing monetary policy. You know how does this environment change your approach and the value proposition of structured credit?
Karthik Narayanan: So to the level set changes in the outlook for the real economy interest rates, corporate earnings, default rates, consumer credit are always going to be inputs both to our portfolio positioning as well as to security selection. Now how the specific inflection point and time period we're in now affects the security selection side of things is actually not that dramatic. And I'll explain why. As valuations change and as our outlook for the real economy changes at the portfolio level, there will be changes in allocations to different sectors. And my job and my team's job is on the other side of that, which is to look at investment opportunities available in the market and underwrite screen for filter stress, test and analyze what we think are the best opportunities in that market on a risk return basis, regardless of where we are in the cycle. So at a time like now, we are going to be more cautious around assets that are levered to cyclical industries or the weaker end of the consumer market. But we always want to be vigilant for those developments because they can create additional downside risk at any point in the cycle. So when those factors come up, we want to incorporate them, but it doesn't really change what we're doing because our underwriting process is intended to look through a cycle. Our baseline thinking is to look at investments on a hold to maturity basis as a starting point for credit underwriting. And we think that very process oriented, long-term approach tends to give us better results. And then, you know, we can layer on top of that valuation considerations and sort of trading in and out of things as valuations change and as the cycle evolves.
Jay Diamond: So let's start with asset-backed securities. Now one of the things we've observed is that opportunities for private investors have grown as banks have stepped back from lending in the share of the market. Is this a secular change, and how are you thinking about this technical side of the market?
Karthik Narayanan: It's a hot topic, Jay. It is a secular change, and it's something that's actually been in play for quite a while. It's getting a lot of-a lot more-airtime in the last couple of years, but it has been in play for a while. If we rewind the clock a bit. Bank regulations took a turn after the GFC and there have been subsequent refinements and rollouts on the bank regulatory front and iterations that bring us to where we are today. But despite all those iterations and revisions and updating, the net effect is banks’ ability to hold credit risky assets has declined. Banks’ ability to trade credit risky assets has declined, and it has flowed back into traditional bank activities such as sourcing originators, warehousing assets, executing financings, whether it's securitization or any type of financing. And as a result, the landscape has shifted to invite and include end investors to become more and more involved the earlier and earlier parts of that traditional banking process. So you can call it a controlled retreat. You can call it invited disintermediation. But the point is that investors have moved further and further upstream to integrate those parts of the value chain as banks have moved away in response to regulatory changes. So the implications for investors, which I think is really the so what of what we're talking about here. It's been complex because this intermediation is an expensive process. It's complicated. And it's not something investors can easily do without both experience and a level of deliberation. Both strategically and in terms of operations. Now, how does this work in practice? It's definitely more of a fluid and sort of multi-dimensional process for deal sourcing than what you would have seen years ago, where, you know, as an analyst, you download a term sheet and upload a third party cash flow model, and, you know, there'd be certain steps that you take in terms of looking at the collateral and stressing it and reviewing the sponsors historical performance. And there's kind of a standard cadence to that, certainly a lot different than that. And with that requires some, you know, deliberate steps to access the market. So we view this entire market from the true public side, which is syndicated securities to sort of gray area in the middle where you have club or bilateral deals that are sort of narrower in syndication, it's more iterative process and sort of developing terms to the sort of pure bilateral private end to the market more as a spectrum, as a continuum, as opposed to two binary markets. It's sort of always the way we've looked at things. And our focus really is, is not to be all things to all people, but is to focus on the things that we've historically built our DNA around, which is financial assets as well as, real estate. So, I think this is a secular change and it's not going to reverse anytime soon.
Jay Diamond: So, given this background, which ABS sectors do you favor now and why?
Karthik Narayanan: Sure. So, coming back to the ABS market, thematically, one thing we have seen is that some of the more traditional ABS sectors that are more widely followed offer less value now, and some of the newer and emerging sectors offer better value. So specifically, to give examples, when we think about whole business securitization or shipping container ABS, probably less value there than we'd like to see. And that we've seen at other points in a cycle. So, we do think there's some value there, but not as compelling as it's been at other points in time. On the flip side, what has been interesting is what I would classify broadly as, digital infrastructure related ABS. So digital infrastructure consists of, ABS backed by data centers or fiber networks or cell towers. So, all telecommunications related to the digital transformation of society and the economy. And what's driving that is the very large CapEx cycle that's going on in all of those asset classes as the market for data, whether it's, you know, sort of digitization of day-to-day activities, cloud migration, cloud computing, artificial intelligence, model building and rollout, all of those things contribute to this CapEx trend. Now, the ABS market for those assets is quite small. It is growing, but it is not big. And the investor base is small. These types of deals are still new. And as a result, based on the rubric I laid out earlier where diversity, complexity and a small investor base all sort of conspire to push up risk premiums, we see interesting risk premiums in this market as well. So if we look at single A-rated intermediate duration corporate bonds as a proxy, and we look at digital infrastructure, ABS of a similar duration and rating, there's a 100 to 150 basis point, or a 1% to 1.5% yield pickup in moving and spending time underwriting these types of assets. So we think that's interesting. We think this market will continue growing, and there will certainly be opportunity to make money and there will be opportunity to make mistakes. So really the credit discipline around this is focusing on lending on contractual and reliable invisible cash flows as opposed to being exposed to asset values. And we think there's incremental yield that can be monetized through good credit work in this market.
Jay Diamond: Now, when you say a pick up of a 100, 150 basis points in a single A asset-backed security over a similarly rated investment grade, what yield does that get you to?
Karthik Narayanan: So, for single A infrastructure that’s going to be around 6%. And you’d compare that to, you know, 4.5, 4.75, on similar duration, similar rated corporate index.
Jay Diamond: Now turning to the market for collateralized loan obligations or CLOs, what do you see their value proposition now? And where do you see potential pitfalls in that sector?
Karthik Narayanan: So the CLO market has really been chugging along this year. Even if we look at the least risky, most senior first priority triple A CLO tranche. And these are floating rate, first priority tranches that have an average maturity of about 6 to 8 years. The credit spreads have narrowed a little bit this year, which is, you know, they've narrowed by about 0.3% or 30 basis points, which is not a lot, even if you compared to high grade corporate index, which is narrowed about 15 basis points on the year, or even the double-B part of the high yield bond index, which has narrowed about 25 basis points. So, you know, all the credit fixed income sectors are in that band now, despite this tepid credit spread change within the low risk triple A part of the CLO market, this market has returned 5.7% year to date. And you compare that to the high grade index, which is returned just a touch over 3%. I think it’s about 3.3% at the time of this recording. And the government heavy Bloomberg Agg has returned something like 2.3% at the time of this recording. So CLOs, despite having not really done a lot in terms of credit spreads, have vastly outperformed because of their higher initial income. So that’s really, really helped them. And this actually compares fairly well with the double B rated bond market, which is at this time has returned around 6% this year. So triple a CLOs have actually done reasonably well in keeping pace. Now that’s all backward looking. Now what comes next? Right. But what I would say is that the CLO market in general is reflecting broader change in the credit landscape. So first off, if you look at the corporate leverage loan market, this is a $1.4 trillion floating rate senior secured market. And this is the collateral that comprises, the asset side of CLOs. This market size has been roughly static since 2022. So there’s no real net supply in the underlying corporate bank loan market away from refinancings and, new issuance, net of, you know, deals getting refinanced and paying down. And the CLO market is seeing a similar dynamic where the volume of new issues CLOs, away from those that are just refinancing, is roughly being offset by the amount of CLOs that are organically amortizing or being, collapsed and called away late in their life. So with this limited growth, we’re seeing the CLO market consolidate around larger managers. So there are a total of 180 CLO managers in the market. However, ten managers account for 25% of the assets in the market. So that’s a change that’s been going on for many years. And that dynamic carries over to new issuance as well as secondary trading, which are very slowly but surely centering more and more around these larger managers. You know, the second point is that a subsector of the CLO market, which we would call the middle market CLOs or private credit CLOs, which have been around for a long time and, you know, are backed by private obligors is this an increasing share of the CLO market. These deals use exactly the same CLO technology of principal support nation, excess interest, performance tests, professional managers running pool, and a large degree of diversity across industry at issuer. Ten years ago, the broadly syndicated or private credit CLO market was, you know, a $25 billion outstanding market. It's about $130 billion today. So it's still only 12% of the overall CLO market. And more importantly, it's under 10% of the outstanding private credit market. But it is growing and it is continuing to offer an interesting investment opportunity from us. And in just speaking about that growth this year, something like 18% of CLO issuance has come from the private credit CLO side despite it being only, you know, 12% of the overall market. So it is a growth area. So on the fundamental side, the bank loan market, which is the collateral for these CLOs, has seen headwinds in the form of higher short term rates, which are now rolling over, and that high interest rate costs, combined with economic headwinds in certain sectors such as healthcare and telecom, have driven ratings downgrades in the last couple of years. And as a result, CLO saw that their holdings of lower rated loans rise and then now stabilize, and now in 2024, start to fall. So CLOs are starting out right now and in pretty good shape. Our outlook for the economy is mixed, but CLOs are given their bondholder friendly structured credit technology and active management by the collateral managers are in a pretty good position in terms of status on their tests and triggers and sort of cushion against defaults or losses that may be on the horizon. Our focus area within CLOs has really been in the single A, AA, and AAA part of the capital structure in both broadly syndicated and middle market close. We talked about performance a minute ago, CLO double B and triple B, so the riskier parts of the CLO capital structure have rallied quite a bit this year, given our more mixed views on the economy and corporate default rates, we don't think the risk reward in those junior CLOs is as appealing as we would like to see to make meaningful investments there. We are not looking for a large pickup in defaults this cycle, but valuations on junior CLOs are not as appealing as we'd like to see for that level of risk. Therefore, our focus has really been in the single A and higher part where we think there is good value and those will remain loss remote through a range of the scenarios.
Jay Diamond: Looking at mortgage-backed securities that are backed by commercial real estate, are you seeing any changes in the commercial real estate market? How active are you in that part of the structure credit market?
Karthik Narayanan: CMBS is a meaningful part of our investment activity in coverage. What we're seeing in that market is, as expected, the impacts that everyone's familiar with in the CRE market of higher expenses, lower demand for certain asset types, namely office and supply constraint, and some parts of the market, such as industrial as well as, you know, higher cost of financing. So all of those things are very slowly working their way through the system. We're still seeing deterioration, both in terms of valuations and operating performance and outcomes in certain parts of the commercial real estate market. And we're seeing stable performance and a reasonable level of visibility in other parts of the market. So it's a very mixed bag, and it's going to be that way for years. In terms of commercial mortgage-backed securities, issuance in that market really fell off last year in ‘23. It's come back to, I'd say, a modest level to the point where it is actually providing exit liquidity for loans that are coming due in sectors that have visible financial performance. But there's a very clear have and have not dynamic going on in commercial real estate ultimately in CMBS. CMBS, like other riskier structured credit, has seen the more junior tranches rally quite a bit this year. And at this point, we think the market is being very optimistic about the outcome and potential risks, especially when you get into deals that have been outstanding for a while, what we would call seasoned mezzanine parts of the market. So, you know, these are bonds that could trade a, you know, $.80 or $0.90 or par. They could trade at $.40 or $0.50 on some of the more distressed parts of the market, you know, which on its surface would pique opportunistic investors interest. And when we dig into these types of lower dollar price seasoned mezzanine, it does look like investors are actually being quite rational and sober about potential range of outcomes. But in being rational and sober, it does not price in a very big risk premium against downside scenario. So, we don’t think this is a, you know, John Templeton blood in the streets kind of situation to get you to a $.40 or $.50 dollar price. We think, you know, the expectations are fairly balanced. And where we are seeing opportunity is in the senior parts of the capital structure. On seasoned commercial real estate backed CLOs, which typically are multifamily oriented, these deals have a lot of structural enhancement. And despite the headwinds in the multifamily market, which I think your listeners will be familiar with and that’s being driven primarily by elevated expenses as well as higher financing costs, are more than insulated against by the credit enhancement in these deals. So that’s one place we think is interesting. Some of the new issue deals on single asset portfolios with, again, properties, it could be industrial, it could be multifamily, where there are good visibility of operating performance. This can offer reasonable value too. But we are still cautious on this market because the fundamentals warrant that.
Jay Diamond: So that brings us to the last of the four structured credit sectors, residential mortgage-backed securities. And again, these are MBS that are not backed by Fannie Mae or Freddie Mac. So what is the background look like for housing right now? And what are you seeing in terms of relative value for RMBS?
Karthik Narayanan: RMBS is one of the areas where we've been more active. So if we recap around all the structured credit sectors, in addition to RMBS, senior CLOs and the commercial ABS sectors are all areas we've been the most active right now here in RMBS, we're pretty constructive on the fundamentals. Borrowers are performing well. They have meaningful built up equity. The loan structures of the mortgages themselves have been prudent and continue to be prudent. The technical picture on the bond side of things is also favorable. There is low mortgage production as a result of challenging home affordability, as well as low coupons of all the in-place mortgages in the market for the existing stock of borrowers. So RMBS issuance, you know, it's higher than it was in 2023, but it is not high on any kind of historical basis. And in fact, the issuance of private label mortgages is not even enough to meaningfully offset the organic runoff of the market of bonds that are already out there. So the technical backdrop from a capital markets and sort of trading standpoint is also favorable in addition to the credit fundamentals. Here, we think, the senior parts of the capital structure in many collateral types are interesting. That could be the non-qualified or non QM mortgages. We're seeing increased issuance in second lien and HELOC backed residential mortgage-backed securities deals as well as re-performing or seasoned loan deals that are coming out of banks or other legacy holders getting securitized or re securitized. Those are all attractive, fairly short duration products that even at the single A level, pick up 80 to 100 basis points relative to similar duration and similar rated corporate bonds. So we think here the fundamentals look good. And the valuations also look good. So it’s just one part of the market where we've been fairly active, there are pockets where we're a bit cautious here. Where they have their particular credit challenges and issues that we would keep our eye on. So I mentioned non QM. I think by and large we are constructive on that market. We think the underwriting is prudent, but not all non QM is created equal. There are some parts of the private label non QM market such as those purely backed by investor properties where there's a lot of variability, originator to originator. And we think the credit risk there are more elevated than I think what market participants are pricing in. And so it's more of a valuation issue there. But I think as if credit losses are a little bit higher than what market participants expect, then that erodes a lot of that excess yield. And so, we're a little cautious on that. Another area of the market that we're a little cautious on are what's called residential transition loans. So there are a number of operators in that market, some much more experienced than others, and some with greater financing access than others. And we're picking through that market with a deal of skepticism. But there are certain parts of the market we think pose some interesting opportunities, but we think the sector as a whole needs to be viewed with some degree of conservatism.
Jay Diamond: Now, Karthik, expanding your field of vision a little bit. As you look down the road, how do you think the structured credit market will evolve over the next few years?
Karthik Narayanan: There's probably a few things thematically that we can say, but I think thematically, what I would say is that we will continue to see the growth of private or nontraditional lending in the asset-backed market. There will continue to be a bigger share of the overall pie in that side of the market. So this could come in a lot of different forms. It could just be non-syndicated or narrow syndicated securitizations. It could be more secured loan format bilateral transactions. And it will also come in the form of risk transfer deals. These are deals that are structured where investors take, risk exposure usually junior risk exposure to a portfolio of loans that are on a bank's balance sheet. And this is really a way for banks to lay off credit risk to a third-party private investor. And it helps them manage their capital position without actually selling the assets. So it's an on balance sheet risk transfer securitization. And this market is something like 60 or $70 billion. A lot of the issuance has been coming in Europe, but it's growing in the U.S too. But this is something I think we're going to continue to see growth in. You know, also on this theme of continued private investments that'll also show up in the form of private credit CLOs, you know, again, small part of the market now 12% of close under 10% of private credit, but that's something that probably see some growth. And I think the last point I'd make is digital infrastructure as a durable trend, at least in the next few years, perhaps much longer. You will likely see an increasing amount of financing coming through the asset-backed market, whether that's fiber networks or other digital infrastructure like data centers, telecommunications networks above ground. There'll be other variations on this, but we will see more of that as well.
Jay Diamond: Well, Karthik, thank you so much for being so generous with your time on this very busy market day. But before I let you go, what would be a main takeaway that you'd like to leave with our listeners?
Karthik Narayanan: You know, in a world of higher yields than we've seen in a long time and ongoing domestic, political and geopolitical, as well as fiscal and economic uncertainty sort of piling up and pushing up risk premiums. It's an interesting time for fixed income and as we've discussed today, not all fixed income is the same. And there's a lot of diversity and variety, especially in the structured credit market. And we think that can be a differentiating source of alpha for portfolios. So I'm glad we were able to speak about this today. It's certainly an intellectually interesting and hopefully, you know, financially rewarding area of the market for, investors. And of course, I appreciate everyone tuning in and lending an ear to our discussion.
Jay Diamond: Thank you again for your time. Karthik. Really terrific. I hope you'll come again and visit with us soon.
Karthik Narayanan: Thanks, Jay.
Jay Diamond: Now, before we wrap up, we do have a question from a listener that was addressed to Tad Nygren, who is our head of governments and agencies, and the guest on our last episode of Macro Markets. So our listener asked Tad the following question: What are your thoughts on floating rate bonds and notes in today's interest rate climate? And here's Tad's response: We still think the front end of the Treasury market offers value, in particular bills and floating rate notes. With the yield curve still inverted, the front end of the curve offers value for income investors. However, with the Federal Reserve now entering an easing cycle, we believe the longer maturity Treasury yields will eventually move lower and experience more price appreciation than T-bills or floating rate notes. Well, that's the answer from Tad, so thank you to Tad and thanks to our listener for sending us that question. And thanks to all of you who've joined us for our podcast. If you like what you are hearing, please rate us five stars. And if you have any questions for Karthik or any of our other podcast guests, please send them to MacroMarkets@Guggenheiminvestments.com and we will do our best to answer them in a future episode or offline. I'm Jay Diamond and we look forward to gathering again for the next episode of Macro Markets. In the meantime, for more of our thought leadership, please visit Guggenheiminvestments.com/perspectives. So long.
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Investors in asset-backed securities ("ABS"), including mortgage-backed securities ("MBS"), and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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