Investors can diversify their traditional long-duration corporate credit exposure by allocating to long-duration securitized assets including Agency MBS, Agency collateralized mortgage obligations (CMOs) and Agency commercial mortgagebacked securities. These asset classes have historically exhibited spread over U.S. Treasuries, favorable liquidity profiles and little, if any, credit risk.
Historically, Agency CMO option-adjusted spreads (OAS) have exhibited low correlation to corporate bond OAS over longer time periods. (Figure 1) As of September 30, the five-year daily correlation between the OAS of the two indexes below was 0.34. Generally speaking, the lower the correlation coefficient between assets, the more efficient the portfolio risk reduction through diversification will be.