The tightening of agency mortgage spreads from the government's $200B purchase program is expected to have a positive "portfolio channel effect" on other risk assets. Securitized credit, particularly the non-qualified mortgage (non-QM) market, is positioned as a key beneficiary of this ripple effect as investors reallocate capital.

In a market where everyone is chasing the same high-quality corporate bonds, driving premiums up, a defensive strategy is to pivot to Treasuries. They can offer comparable yields without the inflated premium or credit risk, providing a safe haven while waiting for better entry points in credit markets.

Due to tight credit spreads, Richard Bernstein Advisors (RBA) has taken the unusual step of eliminating all corporate credit exposure from its portfolios. They favor agency mortgage-backed securities, which currently offer a similar or better yield without the associated corporate downgrade or default risk.

Oaktree sees superior relative value in non-qualified residential mortgage-backed securities (RMBS). The US housing market is under-supplied with tight lending standards. This contrasts sharply with commercial real estate, particularly the office sector. Investors can acquire these non-government backed loans at a discount, offering high-yield-like returns with diversification.

With credit curves already steep and the U.S. Treasury curve expected to steepen further, the optimal risk-reward in corporate bonds lies in the 5 to 10-year maturity range. This specific positioning in both U.S. and European markets is key to capturing value from 'carry and roll down' dynamics.

While currently unattractive, a future, inevitable credit spread widening event (e.g., IG to 165-185 bps, HY to 600-800 bps) will kick off a five-to-ten-year 'golden age' for credit, where corporate bond returns could rival or even outperform equity markets.

Sectors that have experienced severe distress, like Commercial Mortgage-Backed Securities (CMBS), often present compelling opportunities. The crisis forces tighter lending standards and realistic asset repricing. This creates a safer investment environment for new capital, precisely because other investors remain fearful and avoid the sector.

Massive government issuance is crowding out private credit and making sovereign bonds inherently riskier. This dynamic is collapsing credit spreads and could lead to a market where high-quality corporate bonds are perceived as safer than government debt, challenging the concept of a 'risk-free' asset.

Money managers selling mortgage-backed securities (MBS) are unlikely to rotate directly into corporate credit. Despite being underweight corporates, current tight valuations make them unattractive. Instead, managers will likely hold cash and wait for a better entry point from the expected record primary issuance in the corporate bond market.