Barclays Bank: Continued interest rate cuts should have limited impact on mortgage securities.

Barclays Bank analysts Gavin Zhu and Corry Short pointed out in a research report that the continuous lowering of the Fed's benchmark interest rate has limited impact on mortgage-backed securities, as the market's technical outlook remains strong and fundamentals are improving. The upcoming rate cut poses slight resistance to the nominal demand for CLOs, with a neutral impact on spreads and supply, and a positive effect on performance indicators and CLO equity. In a rate-cut environment, the most significant benefit for CLOs is expected to be the improvement in fundamentals - especially for distressed assets. As interest expenses decrease, benefiting struggling groups, more upgrades are expected, leading to a decrease in the proportion of CCC assets. From a structural perspective, the decrease in the proportion of CCC assets, lower default rates, and fewer lower-priced assets should be advantageous for excess collateral tests, with the most immediate benefit being demonstrated in interest coverage tests. As long as rate cuts lead to more new loan issuance and leveraged buyout activities, equity arbitrage is expected to benefit. Barclays predicts three 25 basis point rate cuts in 2025, followed by two more rate cuts in the first half of 2026.