In an environment defined by tighter spreads, shifting rate expectations, and heightened scrutiny of credit risk, investors are reassessing how to construct durable fixed income portfolios. For Sam Reid, partner at Canyon Partners and portfolio manager of the River Canyon Total Return Bond Fund, securitized assets offer a differentiated path toward achieving yield, diversification, and downside protection. 

Reid argues that the structured credit universe—spanning asset-backed securities (ABS), commercial and residential mortgage-backed securities (CMBS and RMBS), and other collateralized instruments—can serve as a complement and diversifier to traditional corporate debt. With amortizing structures, embedded protections, and exposure to diversified pools of collateral, securitized assets can help mitigate idiosyncratic risks tied to single borrowers while delivering compelling relative value. 

Reid breaks down how securitized credit behaves across cycles, the macro factors shaping the opportunity set, and why the asset class deserves a more central role in investor portfolios. 

CM: How do securitized assets fit within an investor’s broader portfolio? 

SR: Securitized assets can play an important role as a diversifier, complement, and source of incremental yield within an investor’s fixed income allocation. One of the most compelling aspects of the asset class versus something like corporate debt is that you have diversified exposure to a pool of underlying loans from a variety of different borrowers and so are less exposed to the idiosyncratic risk associated with a single company.   

Securitized credit can also serve as a nice complement to traditional corporate fixed income with structures that may offer incremental yield relative to other fixed income asset classes. Securitized bonds tend to be shorter-duration, amortizing structures that may offer some protection from interest rate and capital market volatility, paying back principal and interest over time rather than what is typical in corporate debt – hard maturities that require access to capital markets to refinance. 

CM: What are the risks and how does securitized credit perform during periods of stress? 

SR: Securitized credit is not riskless. Performance of the underlying collateral needs to be studied closely and understood over multiple cycles, and many newer asset classes don’t have a long history of performance which can make that challenging. There can be volatility and drawdowns in prices and performance. It is important to work with a manager that has long-standing experience in the sector to understand drivers of collateral performance, how structures behave in periods of stress, and how to manage liquidity and price risk appropriately. 

CM: How do macro drivers—such as interest rate policy, consumer balance sheets, or commercial real estate fundamentals—inform your positioning across the securitized credit spectrum? 

SR: Macro drivers are extremely important to consider in managing a securitized credit portfolio. Generally speaking, diversified pools of risk help mitigate idiosyncratic risk but are very influenced by macro drivers in both the short and long-term. For instance, the inflationary shock we saw in 2022 had a real impact on consumer spending behavior and their ability to finance their debt obligations. For that reason we tend to stay away from the subprime cohort of borrower who are most impacted by inflation. But as banks saw loan performance deteriorate during that period, they tightened lending standards in 2023 and 2024, and as a result loan performance improved markedly across all cohorts, providing a nice investment opportunity for those watching these macro trends. 

Commercial real estate is another great example. When we look at spreads in that asset class they have been some of the cheapest in credit, but there’s a reason for that. While there are some really compelling opportunities for diligent underwriters, many loans in the sector more broadly have extension options which effectively just delay the day of reckoning for many properties, and when we look at the office space there is still a lot of excess supply that will suppress pricing and ultimately default. So, while the spreads are enticing, investors must understand the macro and structural features of the asset class. Incorporating the macro, whether it’s the economy, consumer, interest rates, is essential to effectively managing a portfolio of securitized assets. 

CM: What is my manager’s approach to investing in this space? 

SR: While securitized markets are witnessing exponential growth and attention from the broader investing community to enhance and diversify fixed income returns, it is crucial for an investor to understand a manager’s approach to investing. In our view, a manager’s focus should be using a data driven approach to understanding how collateral performs across cycles (ideally collateral with a long history so performance can be better understood), on originators that are well-capitalized and have established track records, and on structures that help mitigate downside risk. 

CM: Why should investors consider exposure to securitized credit—such as ABS, CMBS, and other structured securities—when building diversified portfolios? 

SR: Securitized credit offers a wide and growing variety of underlying collateral exposure, including auto loans to residential and commercial mortgages to data center financing and many others. Each collateral type is accompanied with unique drivers of performance. These characteristics, combined with a diversified pool of loans within a single structure, can help mitigate idiosyncratic risk and volatility and offer investors a differentiated source of risk and return.  

The complexity involved in modeling and monitoring the underlying collateral is typically rewarded by excess yield relative to other, similarly rated assets. Finally, bonds also typically have defined structural protections that amortize principal and interest payments over time and can divert cash flows to senior tranches in periods of stress, helping reduce portfolio volatility and protect senior noteholders. 

CM: Many wealth advisors are more familiar with corporates and Treasuries than with structured products. What misconceptions about securitized assets would you like to clear up for this audience? 

SR: The two most prevalent misconceptions I hear about the asset class are 1) it is too risky relative to other fixed income asset classes, and 2) it is a small, niche market with limited liquidity. Securitized credit, particularly in the mortgage space, continues to carry some stigma and is often met with caution in the wake of the Great Financial Crisis of 2008. But that is changing. In the wake of the crisis, regulators enacted reform that were designed to improve transparency, disclosure, and underwriting standards for loan originators.  

In addition, structures today can be more resilient than they were pre-2008, offering better credit enhancement and other structural protections to investors. The result has been a burgeoning asset class that has exhibited strong relative performance over the past 15 years. While structural reform and standardization have been big components in the growth of the market, recent bank disintermediation has also accelerated the opportunity set for the securitized products.  

Banks are facing increased regulatory capital incentives to move whole loans off their balance sheets and into securitizations, and originators are using securitizations to be more efficient with their balance sheets, creating an opportunity for private investors. Estimates for the size of the private (i.e., non-agency guaranteed) securitization market are around $3 trillion at the high-end, comparable in size to the corporate leveraged finance market and growing at a faster pace. As securitized markets grow in scale and scope, investor comfort and liquidity in the asset class should continue to improve. 

CM: How has your approach to managing duration and interest-rate sensitivity evolved amid the shift in the yield curve over the course of 2025? 

SR: As a general rule, we like to stay relatively short duration, which should help mitigate price risk from interest rate volatility and allow us to focus more on credit underwriting. This year, given our anticipation of a gradually weakening labor market, we have maintained a modest tactical overweight in duration (around 3.5 years at the portfolio level) but with a bias for curve steepening (i.e., a bull steepener). We generally have more conviction that the Fed will lower the Federal Funds rate (short end of the treasury curve) in response to a weakening labor market than we do on where the term premium (intermediate and long end of treasury curve) should trade given the long-term issues of fiscal deficits and sticky inflation.  

While the market has moved to reflect our view, we still like the optionality to more rate cuts than the market is pricing given our anticipation of continued labor market deterioration and, as a result, are maintaining our position for the moment. As more rate cuts begin to get priced into the market, we would look to monetize some of our tactical overweight and take our portfolio duration closer to a more neutral 2.5-3 years. 

CM: How do you evaluate opportunities across securitized credit compared with corporate bonds in terms of relative value and risk-adjusted return? 

SR: We start from fundamentally different places when modeling securitized and corporate credit opportunities. Corporates are evaluated by underwriting a single company’s balance sheet, income statement and cash flows, whereas securitized credit involves evaluating a pool of assets and then the structural enhancements for various tranches.  

We then stress test and run various macro scenarios to weigh trade-offs in spread, diversification, liquidity and VAR (Value-at-Risk). It’s important to emphasize that the comparison is not apples-to-apples, but over time you better understand how the securities perform and we believe exposure to both securitized credit and corporate credit is important in building a resilient fixed income portfolio, so we typically have risk deployed across both asset classes. Having the mandate scope to evaluate and flexibility to invest across both asset classes is important for both portfolio construction and to take advantage of dislocations as they occur. 

CM: Are there specific segments of ABS or CMBS that stand out to you today as offering compelling relative value? 

SR: Despite elevated prices and stretched affordability for single family homes, we think there is still a lot of value in securitizations backed by residential single-family mortgages. These can take the form of first lien non-qualified (non-Agency) mortgages or second lien HELOCs and closed-end mortgages. As home prices have continued to appreciate, Americans today are sitting on a record $35 trillion of home equity, and mortgage debt as a fraction of home values are at historically low levels, which should provide ample cushion for lenders even in scenarios in which home prices decline.  

Furthermore, the cost of building new homes relative to affordability is high, suppressing new home construction and creating a favorable supply/demand dynamic that is supportive to existing housing prices. We think lending to higher quality borrowers collateralized by homes with ample equity cushion beneath the debt is attractive from both a relative and absolute perspective. 

CM: How does liquidity in securitized markets compare with corporates today, and what does that mean for retail investors? 

SR: Corporate bonds generally trade more frequently and with tighter bid-ask spreads than securitized assets. Corporates are a larger, more established market with a very broad set of investors. But I’d make a few observations. First, liquidity is a bit of a moving target. In calm, functioning markets, corporates tend to offer better liquidity than securitized markets. But in periods of disruption, liquidity actually tends to converge across credit asset classes in my experience.  

So, the relevant question for liquidity is how much do you have when you need it? Securitized credit benefits from what we refer to internally at Canyon as “endogenous liquidity”, structures tend to be shorter duration, pay back principal and interest via amortization, and don’t need access to capital markets to be refinanced.  

Second, liquidity is evolving. As the securitized market grows in size and scope and more investors gain comfort with the asset class, I expect liquidity will converge a bit.  

Third, the investor base matters. Corporates are held by a wider variety of accounts which trade more frequently, but they’re also more subject to client flows and often need to raise liquidity when things are most disrupted. By contrast, securitized bonds are often held by insurance companies and pension funds; longer-term capital that typically doesn’t churn their portfolios as much and are less beholden to market-driven capital flows. For retail investors, if your horizon is long-term, securitized products can often offer extra spread for this liquidity gap and complexity premium. 

CM: Looking ahead to the remainder of 2025, what are the most attractive areas within the credit markets—and conversely, where do you see the biggest risks investors should be mindful of?    

SR: Credit spreads are very tight relative to history and generally pricing a soft landing for the economy. Typically, when spreads are offering as little value as they are today, we tend to position in defensive, shorter maturity securities.  We believe that in exchange for sacrificing a little bit of yield, we can better insulate the portfolio from material disruption from wider interest rates and credit spreads. In today’s environment, we think higher quality corporate securities with short maturities (1-2 years) and yields in the 6-7% context are attractive. When we start to see disruption in markets, we’re able to rotate into “yieldier” securities where we have conviction at a better entry point. I think this is an essential part of being an active manager managing portfolio risk.  

On the securitized side of things, we continue to see value in the Prime Home Equity space discussed earlier and also in Prime Auto Loans. We like the underlying collateral, the borrower base is higher quality, and the structures should offer some enhancement to weather drawdowns in collateral prices and potential losses.  

One of the biggest risks to the economy and risk assets in our minds lies in longer-term interest rate volatility. Much of the incremental leverage we’ve seen growing in the system since 2008 has come on the Federal balance sheet, while private balance sheets for corporates and consumers are in relatively good shape. Continued elevated fiscal deficits along with the potential for sticky inflation pose a risk for the longer end of the yield curve, which is why we currently prefer shorter duration securities and biased toward a steepening yield curve.