Understanding Non-agency Residential Mortgage-Backed Securities (Non-agency RMBS)
The non-agency market is broad and diversified, serving as a catchall for residential credit that is not agency guaranteed. Various subsectors offer exposure to loans with different characteristics, risks, and rewards. Because non-agency RMBS is comprised of heterogeneous assets, we believe investing in the sector requires an active, research-driven approach.
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What are non-agency RMBS?
Mortgage-backed securities are collections of residential mortgages with similar characteristics that are packaged together, or securitized, and sold to investors. In contrast to agency mortgage-backed securities (MBS), non-agency RMBS are created by private entities and do not carry a government guarantee.
Non-agency RMBS within the greater U.S. mortgage market
While agency-guaranteed mortgages make up the lion’s share of the U.S. mortgage market, the non-agency RMBS market is large and diverse, with over $1.7 trillion in outstanding securities.
Non-agency RMBS makes up a $1.7T portion of the $14.6 trillion U.S. securitized market
- Agency MBS │ $9.1T
- CMBS | $1.8T
- CLOs | $1.1T
- ABS | $880B
- Non-agency RMBS | $1.7T
Source: Bank of America, as of December 31, 2024.
Key characteristics of non-agency RMBS
1
Attractive yields
While yields can vary greatly within non-agency RMBS, the sector broadly offers attractive yields relative to corporate bonds of similar ratings.
2
Diversification of risk exposures
In contrast to corporate bonds, where investors are exposed to a single borrower, non-agency RMBS are comprised of pools of thousands of individual loans from different borrowers. Non-agency RMBS also allow investors to diversify their overall risk exposure by including assets linked to the U.S. consumer.
3
Securitization creates tranches with varying degrees of risk
Like most securitized sectors, non-agency RMBS are divided into tranches of differing credit quality. This allows investors to gain exposure to assets within the sector, while also dialing in their preferred level of risk.
4
Prepayment risk
Borrowers may pay off or refinance their mortgage at any point, which would negate the future income on that mortgage. Non-agency RMBS pay an additional yield, or spread, above the yield on a comparable U.S. Treasury to compensate investors for the uncertainty about when, or if, a borrower will prepay their mortgage.
5
Default risk
Unlike agency MBS, which carry a government guarantee and have negligible credit risk, investors in non-agency RMBS are exposed to default risk. As a result, non-agency RMBS pay higher credit spreads than agency MBS.
Non-agency RMBS and the Global Financial Crisis (GFC)
There is no denying that RMBS was a key contributor to the GFC. It is generally accepted that faulty sub-prime mortgages and other non-standard products that were packaged into collateralized debt obligations, or CDOs, proved to be the major contributing factor that led to the crisis.
That said, we believe investors should not eschew non-agency mortgages because of what happened in 2008. Significant regulatory and business practice changes occurred after the GFC that were aimed at ensuring the situation would not be repeated.
Why Janus Henderson for securitized investing?
Expertise and leadership: Our portfolio management team's nearly 60 years of combined experience, backed by a dedicated global team, stands as a testament to our success. This unparalleled expertise ensures we remain at the forefront of securitized investment management.
Market dominance: In the U.S., Janus Henderson is the 3rd largest provider of active fixed income ETFs and also the 8th largest in the overall active ETF market.
Source: Morningstar as of December 31, 2024.
$44.6B
Firmwide Securitized assets under management
- ABS │ 4%
- CLO │ 47%
- CMBS │ 8%
- Covered Bonds │ 1%
- MBS │ 27%
- RMBS │ 11%
- Other │ 2%
Source: Janus Henderson Investors as of December 31, 2024.
Note: Firmwide assets include securitized products available outside of the U.S. and securitized portions of other fixed income strategies.
Dedicated securitized expertise
Head of US Securitised Products | Portfolio Manager
Head of Structured and Quantitative Fixed Income | Portfolio Manager