Residential & Consumer Debt

The spread recovery in the RMBS and ABS sectors continued during the final quarter of 2020, as demand for yield and improving fundamentals supported tighter spreads, particularly for lower-quality paper. For example, Credit Risk Transfer (CRT) mezzanine spreads were approximately 15 basis points tighter, while subordinate spreads tightened around 100 basis points. Student loans and whole business ABS spreads were as much as 50 basis points tighter.

These spread recoveries have been further supported by strong demand for new issue transactions, with deals often significantly oversubscribed. Benchmark new issue AAA RMBS spreads generally tightened around 10 basis points, except for Non-QM AAA-rated tranches, which were roughly 40 basis points tighter. As a result, primary spreads are approaching pre-pandemic levels for several sectors, including Non-QM RMBS, which ended the year with spreads approximately five basis points tighter than in February 2020.

Limited supply contributed to the strong oversubscription levels for newly issued RMBS and ABS, where volumes for the quarter declined 26% and 39% year-over-year, respectively, as the U.S. presidential election likely sidelined some issuers. That fourth quarter activity brought full-year 2020 RMBS and ABS issuance to around $95 billion and $128 billion, respectively, each approximately 25% lower year-over-year.

While structured credit spreads have rallied from their March extremes, spreads for most RMBS and some ABS sub-sectors remain wide of pre-pandemic levels, as ongoing risks related to the implications of high unemployment due to COVID-19 hang over the market. For example, CRT mezzanine spreads remain as much as 200 basis points wide of mid-February levels, and seasoned RMBS spreads are approximately 50-100 basis points wider.

However, risks for the mortgage- and asset-backed sectors have been balanced against collateral fundamentals that have generally exceeded the market’s expectations from March and April. The latest survey of home price indices points to an annual increase of around 8% in the fourth quarter, as limited supply of new and existing homes and strong demand continue to drive price appreciation, and other measures of housing market conditions have recorded a V-shaped recovery through 2020. Mortgage and consumer sectors will benefit from the continued unemployment support and stimulus disbursements included in the December relief package. Additionally, used-vehicle pricing remains near record high levels, which will support auto ABS performance.

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New and existing home inventory is down 20% year-over-year.

New issuance dipped in the fourth quarter, driven by uncertainty surrounding the U.S. presidential election.

Limited supply and a surge in demand resulted in strong home price appreciation in 2020.

U.S. consumers generated significant excess savings from stimulus and enhanced unemployment insurance following the outbreak of COVID-19.

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AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

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