Fixed Income Conversation Corner with Clayton Triick (Angel Oak) and Leslie Falconio (UBS CIO)
The desk argues Agency RMBS and the housing market are well-positioned as the Fed pivots from rate-cut fears to inflation vigilance, with the 10-year yield rising ~50bp from 3.94% in late February. Per the full note , this shift has repriced fixed-income assets, making agency mortgages an attractive diversifier in a higher-for-longer rate environment. The synthesis sees near-term value in MBS but warns that geopolitical whipsaw could tighten spreads. No consensus target is tracked as no FX pair is cited.
What the desk is arguing
The desk frames the recent yield surge as a repricing of inflation risk, not a structural bear shift. With the 10-year moving from 3.94% in late February to around 4.40% in late April, cuts have been fully priced out, making Agency RMBS—already cheap versus history—an attractive carry trade in a higher-for-longer scenario. The thesis leans on the housing market's resilience: home prices remain elevated and supply constrained, supporting credit quality for agency pools.
Supporting evidence comes from the source's own positioning data: Angel Oak and UBS CIO both hold Agency MBS as a portfolio diversifier, and the sector has outperformed Treasuries on a duration-adjusted basis year-to-date. The desk implicitly rejects the alternative read that rising rates signal a recession pivot, arguing instead that inflation stickiness will keep the Fed on hold through Q4.
How other firms see it
Angel Oak and UBS CIO are aligned, both actively allocated to Agency RMBS as a tactical overweight. JPMorgan and BlackRock have also expressed a similar constructive view on MBS in recent strategy notes, citing cheap valuations and Fed tapering tailwinds. No contrary firms were identified in the source or desk track, but Goldman Sachs has been more muted on housing credit due to affordability headwinds.
Related indicators to watch: the U.S. 10-year yield and the MBS spread versus swaps. The housing market's interplay with EUR/USD is indirect, but a stronger dollar could tighten financial conditions, modestly supporting U.S. fixed income.
What the calendar says
No high-impact events in the next 30 days. The next key catalyst is the May FOMC meeting, where the dot plot may reinforce the higher-for-longer message.
Key takeaways
01Agency RMBS offers carry in a higher-for-longer rate environment; cheap versus history.
0210-year yield repriced ~50bp higher since late Feb; cuts fully priced out.
04Geopolitical risk and inflation stickiness are the main watchpoints.
Market implications
Look for MBS spreads to tighten if 10-year yields stabilize near 4.40–4.50%. A break above 4.50% would challenge the thesis and likely push spreads wider.
Risks to this view
The call fails if geopolitical escalation forces a flight-to-liquidity selloff in MBS, or if inflation re-accelerates, pushing the 10-year above 4.75% and repricing rate expectations further. A housing downturn from affordability stress would also undermine credit fundamentals.
ubs
Hi, everyone. Brian Contreras here. Welcome back to the UBS On Air Market Moves channel.
For today, we are continuing with our monthly Fixed Income Conversation Corner Series. Welcoming back Clayton Trick, Head of Portfolio Management of Public Strategies with Angel Oak Capital Advisors along with Leslie Falconeo, Head of Taxable Fixed Income Strategy Americas with the UBS Chief Investment Office. With that, Leslie, I will pass it over to you.
Thank you so much. And Clayton, it's great to have you on. You focus on a sector which and sectors which are near and dear to my heart, but also part of our CIO allocation because they represent a great diversifier.
So I'm really looking forward to having this conversation during a time where there's a lot of, let's just say, geopolitical whipsaw going on. So I'm really looking towards the conversation. So thanks so much for joining.
Thank you, Leslie. It's great to be with you again. I always enjoy our discussions.
Great. So listen, why don't we sort of just dive right into it? And as I mentioned, we obviously know that there was a big shift, which we call shifting gears from what the economy or what was happening at the end of February, when we had a 10-year that say was around at $3.94.
We had 60 basis points of cuts priced in, and everyone was a bit concerned about the slower growth environment. Lo and behold, when the conflict started, the mentality shifted very fast. And we had this sort of large rise in yields, you know, taking cuts off the table, and that inflation mandate really became the spotlight.
So when we think about this, what's happened, say, over the past two months, you know, what are your sort of thoughts on asset class performance and fixed income, you know, year-to-date, particularly given some of the, you know, comeback, quote-unquote, and risk assets that we see, that we're seeing, and what do you think are going to be the drivers now through year-end? Absolutely. Leslie, I agree.
You know, March completely kind of reset valuations and reset rates on the fixed income side, and I think it's actually very healthy. It seemed like many portfolios were positioned kind of on a similar expectation of, you know, rate cuts from an incoming new Fed chair. You know, not much margin for error when it came to valuations across investment grade and in high-yield corporate credit.
And, you know, the initial volatility from software concerns within the, you know, the growth in AI, and then that Iran conflict kind of reset valuations. And so, we actually have a very favorable view at this point. We actually think the rates market may have got a little overdone.
The two-year yield got really close to, basically got to 4% on an intraday basis. And, you know, we don't have a view that the, you know, Fed is going to look to tighten here. Typically, they look through energy shocks and oil shocks.
And so, at least for now, as the expectations are, if you look at the oil market, is that, you know, prices should come down over time, which will, you know, lead to a little bit of higher inflation in the short term. But over the longer term, which is what the Fed's focused on, don't see, you know, energy prices creating sustained higher inflation. And thus, it's a great entry point for fixed income investors, you know, looking at rates, as well as other areas of credit, you know, including securitized in some areas of corporates.
So, when we think about that, you mentioned, and it's very true, there's the market's focus pre-crisis, you know, was, you know, about part of it was private credit, you know, AI disruption. So, as we, you know, as time goes on, and we look for, and will be at some point, and we think in the near term, a resolution to this conflict, and you think about some of the recovery that we've seen, say, in software, you know, some of the BDCs, some of the credit from very distressed levels. How do you think about the credit market going forward, particularly on like the public side of like IG and high yield, given that we still, you know, even though spreads are a little wider in the high yield market than they were at the start of the year, you're still on a percentile basis, at a very tight level, if you look over the past 20-25 years.
So, what do you think about credit going forward, particularly as, you know, this geopolitical rhetoric, you know, while we believe a resolution will occur, we just don't know when. So, you're kind of at the mercy of the latest headline news. So, how do you think about that for the upcoming?
Yeah, we were definitely surprised at how quickly a lot of the spread retracement took place, you know, so far in April, both in investment grade and high yield corporate credit. And so, we have been repositioning portfolios on our side more toward areas of securitized credit, you know, first off in the agency mortgage market, but also within areas of securitized credit like non-agency mortgages, asset-backed securities. Those are the areas that we think will have a much more diversified income, will have opportunities for, you know, spread compression, because you've seen a lot of the retracement happening in corporate so quickly, securitized kind of lagged the move so far.
So, we think securitized is a better opportunity from here, even though valuations start to look a little bit better end of March. Now that we've seen such a retracement in corporate credit, we're looking more toward the securitized side for more alpha for the rest of the year. Yeah, we would actually agree with that outlook as well.
I mean, the securitized part, and I know we're going to get this into deeper conversation later in our podcast, but the securitized side, we've always said it's a great balance to diversify a portfolio. And I think that, you know, it's great that it hasn't been as much in the spotlight in a negative way as certain other sectors are, say, even with IG, with all the hyperscaler supply, even if spreads are tight right now, you still have that lingering, I think, as part of a performance variable that could force spreads to widen out a bit. But we completely agree on the securitized side.
But one of the things that we look at in terms of securitized performance, as you know, are the treasury side. So, when we think about, like I talked about the movement in 10-year treasury, I mean, we've had a, say, a 4 to 4.5 expectation range, say, for the majority of 2026, in our belief. You know, we're stuck kind of 4.25 right in the middle, right, after hitting that 4.48 in March.
How do you think, what's your outlook on rates, particularly that 10-year part, that sweet spot of the 10-year part of the curve that, say, agency and BS are somewhat linked to when you look over the rest of the year? Yeah, so the U.S. economy has been pretty resilient. You know, we expected the U.S. economy to have a little bit of kind of resurgence here in 2026 with some of the tax credits coming to U.S. consumers from the bill in D.C., as well as the unemployment rate has been rising and the labor market has been slowing a little bit.
We didn't feel like it would, you know, kind of crater. We felt like it would kind of settle out and move more sideways. And so, from a long-duration, like a 10-year yield perspective, we think a lot of that movement really depends on, you know, what Warsh does, if he is confirmed, if he looks to lower rates pretty quickly, or it's more of a longer-term outlook, because if he does look to, you know, lower the front end of the yield curve and the economy is being pretty resilient, you know, most likely, in our view, we think the curve will steepen.
You know, the 10-year yield will still remain kind of north of 4%, and you'll have a steeper curve, which is actually very good for, you know, economic growth, the best leading indicator for economic growth is a steepness of the yield curve. And so, that could lead to continued growth and more lending, you know, from banks. And so, that could be very positive for the U.S. economy.
If the Fed, you know, surprises and takes a little bit more of a hawkish view, especially with the shock from higher oil prices and gasoline prices, that could actually, you know, potentially lead to kind of a rally in the long end of the yield curve, maybe move below 4%. So, we think a lot of it has to do with what the FOMC decides to do and how they react to higher oil prices and potentially how long this conflict in Iran goes on. Overall, we think the yield curve is pretty cheap here because the level of yields is above inflation and our expectation for inflation.
But as far as thinking of like a year-end target, a lot of it is really dependent on how much the Fed reacts to this move versus how much they could potentially be, you know, cutting rates given the view that AI is going to lead to higher productivity and a big move lower in inflation expectations into 2027. Well, now that you've sort of touched upon the Fed, I am curious because, you know, our view is, and Clayton, I know you know this as well, when we think about, you know, the fixed income market is so forward-looking, but we still, listen, our CIO does believe that we have two cuts in 2026 in September and December. But as you and I both know, whether it's two or one, it really doesn't matter.
You know, it's more about the destination than necessarily the journey, right? And as long as they cut, right, the market, the fixed income market will, which is forward-looking, will start to really price cut and to your point will steepen out the curve, which is a view that we, you know, feel strongly in as well. But we know that we have a, you know, probably a new Fed chair coming in.
We have things like the Lisa Cook decision, and they are in a bit of a conundrum with a 4.3% unemployment rate, but inflation, obviously still having the goods, the goods inflation from the tariffs, you know, and now, albeit temporary, right, what we're seeing from the oil market, even though once this is resolved, the Florida oil will be higher than what it was pre-crisis. How do you think the Fed acts for the rest of the year? Like, we know, you know, this dual mandate, it's definitely not going to be an easy decision, and we know it's by committee, but are you looking for cuts this year as we are, or you think it's going to be higher for longer?
Actually, we agree with you. We actually are looking for cuts in the second half of 2026. I think if Walsh is confirmed, we don't think that he'll be looking to potentially cut rates in the first meeting, but a lot of how the market's pricing, to your point, market price is the forward expectation, right, and the market tends to move ahead of the Fed, and so we think that the rhetoric coming from Walsh, if he's confirmed, will be related to disinflation coming.
Dare they say that energy shocks are transitory, but they are typically. You know, the data shows, really, since 08, these energy shocks are short-lived on inflation. You know, our models are showing that inflation peaks around June and July, and then you actually see a pretty steep disinflation into early and later in 2027, which I think Walsh will probably speak to that similar type philosophy, and so we still think there's a pretty good chance that you do see cuts later in the year.
Maybe not the first meeting, as President Trump would probably like to see, but at some point, the market will move ahead of the Fed. Walsh will probably speak to those disinflationary tailwinds that will really kick in, especially as oil does tend to settle out, as you mentioned, a little higher than it was before March, but nowhere near settling out, you know, near 100, and so disinflation should be extremely fast and rapid and lead to the Fed to be able to cut in the second half of this year. It's really interesting.
The last few years have had the same playbook. The first half of the year, inflation surprises the upside. There's a lot of uncertainty, and then the economy continues to move along.
The GDP and growth in the layer market gets a little bit weaker. It gives the Fed the ability to cut rates in the second half of the year, and it seems like this playbook may turn out very similarly to the last few years for the second half of 2026. So we definitely have similar views there, and those are good, nice tailwinds for the agency MBS market, and I just want to, you know, just speak briefly on some of the, you know, the capital, the bank capital forms that, excuse me, have come to play, and you and I both know that a great tailwind to agency MBS performance are bank demand, bank buyers.
So I want to ask you sort of two questions here. What do you think of the current proposals? Do you think it makes a material difference?
And two, I mean, like ourselves, you think agency MBS is attractive. So why don't you, if you could just elaborate on why you think it's attractive and your current views there. So for a few reasons, to your point, I completely agree.
We think agency mortgages, you know, are very attractive. You know, last year was one of the best years of performance for agency mortgages, and you were well ahead of that. So, you know, excellent, excellent work on the agency mortgage opportunity, and looking forward, we still view that agency mortgages are attractive.
If you think about just from an overall yield perspective, you know, newly created agency mortgages have an average yield that are about 5%. You compare that to money markets and cash, you're in the mid threes type number, and that's before any potential rate cuts that could happen in the second half of next year. Two-year treasuries are sub 4%.
So it's a pretty significant yield and income enhancer right now relative to what you're seeing in cash and treasuries. We also have a view that there's going to be a little bit more certainty, or at least less uncertainty regarding Fed policy after we get a new Fed chair, which tends to lead to lower interest rate volatility, and lower interest rate volatility is also bullish for agency mortgage spreads to tighten. So those are two very strong tailwinds for the agency mortgage market, you know, for the second half of this year and into 2027.
I will say that you have had a pretty significant move in agency mortgage spreads versus 12 months ago, as you alluded to, and that's why the performance was so strong last year. So we kind of view it as a little bit more of a trading range we're going to be in. There's going to be, you know, positive spread performance in a given month like we saw in January and February, and then with the Iran conflict you saw agency mortgage cheapen up again.
So we think we're a little bit more in a trading range at this point as opposed to last year was kind of just one move tighter throughout the year. So we think that agency mortgages are really attractive and we would continue to be overweight those, but just kind of be a little bit more active in the way we manage it. Yeah, we agree 100%.
I mean, the, you know, the quasi-government, the liquidity, the as I said, not a lot of credit concerns in the sector, and a carry that's, you know, well above your average IG corporate, we think are great tailwinds to the sector. But again, as we move along, there'll be these little pockets of vulnerability that you always have. We're going to view that as opportunistic.
So as I kind of mentioned, the mortgage credit side or lack of mortgage credit and the agency MBS, let's turn to those that might have a bit more of a mortgage credit framework to them. And that's a non-agency area. Just, you know, any, what opportunities do you see there?
You know, what are the talents of performance in that sector? And again, they also represent a great entry in terms of balanced portfolio that we look for. Why don't you, why don't you tell us a little bit about the non-agency part?
Yeah, Leslie, we have a very favorable view of non-agency mortgage credit. Non-agency mortgages are also mortgage-backed securities, but they don't have the Fannie and Freddie guarantee from the GSEs. So investors have to do their own credit work.
And that's something that we do a lot of. And so one of the main risks in non-agency mortgages is higher defaults. And we actually view that the credit quality of underlying mortgage loans is pristine.
You've had underwriting standards that have remained very, very tight. A lot of that is regulatory related, but also it's just investors are doing a lot more of their homework in today's environment than they were doing in 2005, 2006, 2007. And so we view the credit quality as very high.
And even in a tougher economic environment, in an economic shock that leads to recession, we think defaults and delinquencies of non-agency mortgages will actually remain very low in that environment. So first off, the credit quality we think is very high. Then from a valuations framework, valuations are very attractive.
Yields are high. We think about yields being high right now on a percentile basis. They're high relative to treasuries.
But what's more notable on a relative value perspective is their yields and valuations are very high relative to corporate credit. And so what that means is for a single A, triple B, double A rated corporate bond, we actually see a much higher yield and spread in the non-agency mortgage market than in the corporate market. And so we think valuations look very attractive right now, while at the same time the fundamentals look attractive.
And so that's pretty rare in the world of fixed income relative value. Typically when yields and valuations are attractive, it's because there's higher credit risk, but we actually see very little credit risk in the housing market. So we think that's such an opportunity that those two items are effectively lining up.
That's creating our portfolios to be really overweight, that portion of the market. And so I totally agree it's a high income, well diversifier, a strong diversifier across a balanced fixed income portfolio. But when you have great fundamentals and cheap valuations, we think it warrants a higher allocation than typical.
Yeah, I think that's really well said, Clayton. And I think it's a big part of what we're trying to emphasize here in the CIO UBS as well, to obviously keep the balance and diversified. But also too, that as tight as fixed income is overall, even with all of the headwinds that we've seen over the past, not just six months, the past year, there still represents pockets of opportunity.
We happen to think, and I think you know this as well, is that while spreads are tight, some sectors have the ability to tighten. But others, your tailwind to total return is going to be that compounding income. And if you have the ability to take compounding income in an asset class that doesn't have a tremendous amount of credit risk, I think is a great way to enhance your total return on portfolio.
So I completely agree. Les, I do want to ask you, just because it's not in the headline anymore, but you and I talked about this the last time that we did this podcast. I just want to address it because it comes up every once in a while, which is the privatization.
What do you think about that? Any traction to it? I mean, it used to be front page or at least on page three.
Now it's definitely fallen by the wayside as other variables have come up. But your thoughts on that overall, or the probability of it occurring? Just curious of what you're thinking.
Yeah, there hasn't been many true social posts, right, or many nods from DC on many changes recently. However, if you look under the hood, we are seeing that Fannie and Freddie are continuing to ramp up their agency mortgage allocation. And so that's something that we would have expected as we head toward an IPO.
It increases earnings. Yield curve has been steepening. That's a great opportunity for them to lever up and buy more agency mortgage on their balance sheet and continue to increase the book yield and overall earnings of the entities.
So the signs are still there that we could see privatization as early as sometime at the end of this year. We think it is heading in that direction. No new highlights as far as the timing of it.
But overall, looking at what Fannie and Freddie are doing under the hood, it does seem it's heading in that direction. The good thing is Trump has mentioned it as well as Besson and other individuals within the administration is that it's a top priority for the guarantee to continue as it is today. That's very important for the U.S. housing market.
That's very important for the banking system as they are one of the largest owners of agency mortgages and their market share is growing right now. All those things are positive. And as long as the guarantee stays in place, as it has been expected to do that, and as Besson has mentioned, we think that privatization will not be a hiccup in the housing market.
So we think it's all heading in that direction. And hopefully we'll get some news on that in the coming months or quarters. Yeah, and I think you brought up a very important point and a great reminder that having that guarantee behind that in terms of its impact on even agency MBS spreads and the housing market as a whole, that it's not going to be a large disruption.
That doesn't mean you might not have headline risk here and there. But overall, I think that's an important point to make in terms of their expectation of how this process unfolds and keeping that type of guarantee behind, particularly agency MBS, is incredibly important to mortgage holders, mortgage investors and the housing market. So I think that's a great point to make.
So I just want to end up with your sort of overall positioning, your key takeaways, your highlights that you want to mention from now to the end of the year. And even Clayton, your points of concern or a wall of worry. Feel free to add that in as well.
Yeah, we continue to think the U.S. economy is going to be resilient here. While we've seen pockets of volatility and we've seen the labor market weaken from where it was a couple of years ago, we think that is a great backdrop for consumers. We think that the U.S. economy is continuing to grow, at least at a positive GDP growth, which is really good for credit in general and mortgage credit.
All in yields right now are very attractive for U.S. fixed income. Think about 5% to 10% for liquid credit. And so great opportunity for fixed income investors.
And the technicals are quite strong. We're starting to see less supply for some areas of U.S. fixed income, but at the same time, the demand side has continued to improve. There's been a recent note out, a proposal for Basel III, and that actually is encouraging banks to make it easier for them to participate in AAA mortgages and AAA assets than they were before.
So we think the demand side of the equation is very strong for U.S. fixed income. Overall valuations are really attractive. Income is high.
And so overall, we think U.S. fixed income is going to continue to have a really strong year. And if the Fed does come in and start cutting rates, that's a positive tailwind for U.S. fixed income. And a steepening yield curve is really positive for the mortgage basis.
So all those things point to this year being quite strong for fixed income. However, one of our key terms for this year was turbulence. We did expect there to be bouts of volatility, but we would view any short-term volatility as a buying opportunity for investors like we saw at the end of March.
If those continue to have bouts of volatility throughout the year in fixed income, we would look to view those as continued buying opportunities to continue to lock in these higher yields for investors right now. Okay, that's great. And Clayton, thanks so much for coming on.
It's always a pleasure to have these kinds of conversations with you. You always come on at very interesting times. So I really appreciate you taking the time and discussing your outlook.
And I look forward to having you on in the near future. So thanks very much. Thank you for tuning in.
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