Reassessing Core Income in a Changing Market
In the search for consistent, risk-adjusted income, many investors are reexamining the foundational elements of their fixed income allocations. Traditional fixed income allocations no longer provide the same balance of yield and stability that once defined the core bond market.
The challenge is not simply identifying where income is available, but rather determining which income sources offer reliability, liquidity, and structural clarity within evolving market conditions. In Part 1 of this series, we explored why residential credit is reemerging as a compelling source of income. Here, we take a closer look at the structures driving that opportunity.
Core residential credit strategies are gaining renewed relevance as a potential solution. These are not speculative yield plays or complex private structures. They are purpose-built vehicles intended to provide consistent income profiles, supported by real assets and transparent underwriting.
As interest rate volatility and market uncertainty persist, these strategies are being viewed less as niche ideas and more as fundamental building blocks for income-oriented portfolios.
Residential Credit: A Familiar Asset with New Momentum
Residential credit is not a new concept. It has been a core pillar of the U.S. fixed income market for decades. However, recent structural developments have sharpened its appeal in ways that align with current portfolio needs.
Stricter post-2008 underwriting standards, high levels of homeowner equity, and the emergence of institutionally structured vehicles have combined to make residential credit more accessible and, in many cases, more compelling for investors seeking reliable income. Many of today’s structures offer well-defined collateral, credit protections, and liquidity profiles that enable them to fit seamlessly into diversified models.
One of the defining features of residential mortgage credit is its amortizing structure. Unlike corporate credit, which often maintains full principal exposure until maturity, residential mortgages steadily pay down principal with each monthly payment. This self-deleveraging profile reduces credit exposure over time, offering a built-in risk mitigation mechanism. When paired with the security of real estate collateral, it creates a structurally resilient asset class that aligns well with long-term, risk-aware investment strategies.
This renewed relevance is particularly pronounced in environments where traditional bond allocations have struggled to meet yield or duration targets. For investors who require consistent income but are wary of equity volatility or the opacity of some private credit offerings, core residential credit strategies may offer a more efficient path forward.
Credit Risk Transfer (CRT) and Select Non-Agency RMBS: A Closer Look
Two structures are particularly relevant when considering core allocations: Credit Risk Transfer (CRT) securities and select Non-Agency Residential Mortgage-Backed Securities (RMBS).
CRTs are structured to transfer credit risk from conforming mortgage pools—originated under the standards of Fannie Mae and Freddie Mac—to private investors. While these securities are not guaranteed by the agencies themselves, they are tied to high-quality pools underwritten with rigorous credit criteria. This includes conservative loan-to-value ratios, full documentation, and high borrower credit scores.
A key advantage of CRTs lies in their floating-rate structure, which helps mitigate interest rate sensitivity while maintaining income potential. In an environment where duration risk remains elevated, this feature offers clear benefits to advisors managing portfolios for interest-rate-sensitive clients.
Tranches of non-agency RMBS represent another core opportunity. Though these mortgages may fall outside the agency umbrella, many are underwritten to conservative standards and backed by borrowers with strong credit profiles. When structured appropriately, these bonds can offer higher yields than agency MBS, though subject to market and credit risk.with credit enhancements such as subordination, excess spread, or overcollateralization that help preserve principal and support stable cash flows.
Both CRTs and Non-Agency RMBS offer something that is often lacking in traditional corporate credit: exposure to real asset-backed cash flows that are structurally distinct from corporate operating cycles. This separation from equity beta can help enhance portfolio diversification while preserving income integrity.
A Flexible Fit Across Portfolio Models
One of the distinguishing characteristics of core residential credit strategies is their versatility. They can serve as:
● Replacements for portions of the fixed income sleeve where spreads do not appropriately compensate for risk;
● Complements to alternative allocations for clients who want real estate exposure without direct property ownership or long lock-ups;
● Stabilizers in portfolios that may be over-indexed to equity risk or correlated credit exposures.
Unlike illiquid private vehicles, CRTs and select RMBS are actively traded, priced regularly, and offer institutional-level transparency. These characteristics help make them suitable for portfolios where ongoing oversight, reporting, or tactical rebalancing is important.
In retirement-focused models, these strategies may reduce reliance on high-yield corporates or structured credit with complex risk profiles. For growth-oriented portfolios, they can offer a stable income layer that supports broader allocation decisions without sacrificing liquidity.
Looking Ahead: Enhancing Yield Without Compromising Structure
As the income conversation evolves, many investors are expanding their lens beyond the core to explore responsible yield enhancement strategies in residential credit. These include second-lien loans, non-qualified mortgages (non-QM), and bridge lending, all of which offer additional income potential while preserving underwriting discipline.
To learn more about the structures and strategies discussed here, Ellington’s New Income Equation eBook offers a deeper exploration of today’s residential credit landscape for income-oriented portfolios.