An under-the-radar asset class for reliable yields as rates fall

With markets pricing in another 50 basis points of cuts to the RBA cash rate — taking it to around 3.60% — savers and conservative investors are under pressure to generate reliable yields without taking on excessive risk.

Traditional safe havens like term deposits, government bonds, and high-grade corporate debt offer limited returns, and falling rates threaten to squeeze yields even further. Meanwhile, riskier credit products, while offering higher returns, expose portfolios to greater volatility and potential capital loss.

According to VanEck, one asset class that could fit the needs of investors seeking high yields with the critical element of capital stability is Australian Residential Mortgage-Backed Securities (RMBS).

At a recent webinar, VanEck’s Senior Associate Pranay Lal and Senior Business Development Manager Campbell Stevens explored the strength of the Australian RMBS market — and why it presents a compelling opportunity for investors today.

What exactly is RMBS?

At its core, RMBS are pools of residential mortgages packaged together and sold to investors. Unlike traditional bonds where repayment depends on a corporate balance sheet, RMBS cash flows are supported by the ongoing repayments of Australian homeowners.

“Instead of the lender’s own balance sheet, it's the pool of mortgages that supports investor payments. And the tranching structure ensures that senior investors, such as those in AAA tranches, are the last to suffer losses if defaults occur," Lal explains.

Transparency is another important benefit, with lenders publishing regular data on arrears, loan-to-value ratios (LVRs), and geographical exposures within mortgage pools.

A resilient market amid macro uncertainty

It’s important to recognise that the Australian RMBS market is underpinned by a strong history of sound regulation, with a performance record that stood in stark contrast to the U.S. — particularly during the 2000s.

Australian mortgage arrears have remained remarkably low over the long-term, peaking at just 1.8% during the GFC, compared to 15% in the U.S.

“A key difference is that in Australia, subprime lending remained minimal at around 2% compared to 20–25% in the U.S. pre-GFC,” says Lal.

Critically, Australian mortgages are predominantly floating rate, meaning borrowers receive the benefits of rate cuts quickly, and loans are full-recourse, so the bank can sell a borrower's house and pursue their other assets to recover the full value of any loans.

To date, no Australian AAA-rated RMBS tranche has experienced a capital loss — a testament to the quality and prudence of local banking regulations.

 “That really speaks to the structural features supporting Australian mortgages,” Lal says.

Why income investors should pay attention now

With the RBA expected to cut rates, yields on traditional fixed income investments are likely to fall even further. The search is on for alternatives offering better income without excessive risk.

This is where Australian RMBS could offer an advantage. Naturally, if rates fall, yields on floating rate products will adjust lower too.

"But RMBS offers more than just floating rate exposure — it offers a structural yield premium over traditional cash and senior debt investments," Lal says.

Even as rates decline, the extra yield from RMBS relative to other fixed income products should stay intact. Historically, AAA-rated RMBS have delivered around 80 to 100 basis points more than similarly rated securities.

"You’re getting that yield premium — and you’re actually taking less credit risk," Stevens adds.

 "That’s a compelling proposition, especially in a lower rate environment."

Accessing RMBS exposure

Historically, access to Australian RMBS has been limited to institutional investors. But VanEck is bringing it to the retail space with its newly-listed VanEck Australian RMBS ETF (ASX: RMBS).

The fund provides diversified exposure to a portfolio of over 100 AAA-rated securities, with a management fee of 0.29% and a current yield-to-maturity of 5.3%, paid monthly.

"You’re getting an 80 to 90 basis point uplift compared to floating rate notes — and you're actually taking less credit risk," Stevens says.

He also points to the fund's modified duration of 0.3 years, meaning capital values should hold up whether rates go up or down, while Lal believe the asset class is a good compliment to well-diversified fixed income portfolios.

"AAA-rated RMBS have shown low correlation with the broader fixed income market because their performance is tied to residential mortgages. We believe that makes them a valuable diversifier for many investor portfolios," Lal says.

ETF

VanEck Australian RMBS ETF (RMBS)

Australian Fixed Income

View