Income investors are trying to determine how to obtain reliable and consistent income with defensive characteristics in the rising interest rate environment, according to Ashley Burtenshaw, co-founder and Chief Investment Officer, at Gryphon Capital Investments.
“Our data confirms the RBA’s findings that rate rises will not impact Residential Mortgage Backed Securities (RMBS) investors as much as the market may anticipate,” Burtenshaw said.
“RMBS offer an advantage over bonds as while they are similar in structure they are floating rate notes. This means that the income investors receive from an RMBS investment increases as interest rates increase.”
In terms of risk, he says “RMBS also sit higher in the capital structure and consequently issuers are required to pay these obligations in full ahead of senior unsecured bank debt, hybrids or dividends, providing additional security.”
“Our in depth and specialist focus on the domestic mortgage landscape reveals a level of certainty around borrower affordability and we see no reason why RMBS can’t continue to prosper in delivering the highest comparative returns for the risks involved for income investors.”
For example, he notes the average Australian home loan payee is 2.1 years ahead of their mortgage payments*. “This means that they could miss over two years of mortgage payments and still be current with their mortgage.”
The RBA’s own Financial Stability Review (FSR)* released in April 2022 shows that it is very focused on the impact of rate rises on the housing market. The report notes that most borrowers are well positioned to weather rate increases having built up substantial overpayments on their loans during the pandemic, citing “strength in household balance sheets has been underpinned by high savings, the strong labour market and rising house prices”.
Mr Burtenshaw said the rate rise was “the first rise in 11½ years – and will likely not be the last. The RBA is behind the US Federal Reserve which started to tighten monetary policy with a 25-basis-point increase in March 2022.”
Gryphon is a fixed income manager specialising in residential mortgage-backed securities and asset-backed securities.
* RBA Financial Stability Review April 2022.