Why yield hunters are turning to this section of the credit market

Investors have been somewhat spoilt for choice when it comes to income investing over the last year. Yields have been higher than in decades and credit spreads are close to multi-year lows. Equity markets have surged, with many investors reaping returns from dividends.

But, now inflation has spiked once more, forcing us to consider a new normal of inflation at around 2-3%, or higher. Investors must now take a closer look at the real rate of return on their investments and what it means for their income. After all, the 4.5% yield on a 10-year Treasury bond sounds far less attractive when you consider an inflation print just over 3%.

The result of all this?

Real Asset Management’s (RAM) Michael Frearson notes higher yielding income solutions are more attractive than ever.

He points to strong ongoing demand for private credit due to attractive relative yield compared to public markets and the growing gap created by the phase out of AT1 bank capital (hybrids). He is seeing Australian asset-backed securities, including mortgages, garner significant demand globally for their high-quality and premium yields.

The interest has even hit RAM’s own investment offerings, closing the book build a week ahead of schedule at $300m in commitments for its recently launched and market-first RAM Secured Income Notes (ASX: RAMHA). The Notes are senior, secured and pay 1-month BBSW + 3% monthly, and have continued to trade around face value or just above since launch.

In this interview, Frearson discussed the Australian mortgage space and its appeal for yield hunters, the composition of the RAM Secured Income Notes and how investors are using instruments like this in their portfolios.

Why mortgage yields stand out in today's income market

Talking (or whinging about) all things property might be an Australian pastime. Those looking at an investment property for rental income might consider that the average capital city gross rental yield in November 2025 is 4.4% for units and 3% for houses. This is before factoring maintenance, property fees and mortgage repayments of course.

By contrast, the income generated on residential mortgages - the underlying assets in RAMHA - is materially higher.

Frearson notes typical rates on mortgages vary – but are higher on the whole.

“Major banks are in the low-to-mid 5%, non-banks in the prime space are offering low-to-mid 6%, and other types of borrowers are still comfortable paying 7% plus for the right type of flexible funding,” he says, adding that, "the yield on the loans in the RAM Secured Income Notes range between 6.5% to just over 7%, in addition to securitised investments paying slightly more but benefitting from additional diversification and lower ranking capital." 

The high prices investors often bemoan are also a benefit in this instance.

“Increasing property prices is a credit positive because the loan-to-value ratio (LVR) underpinning the loan goes down, meaning there is more equity to protect the senior borrower. It doesn’t make much difference from a new borrower perspective because every borrower is independently assessed prior to loan approval to meet serviceability requirements. It’s not a key driver of risk in the sector,” he says.

The yield on whole mortgages is also attractive compared to other parts of the credit market.

“Using RAMHA as an example, it’s offering a yield premium of 3% compared to the 1-month bank bill swap rate, 2.5% premium on government bond yields, 100-150bps premium on investment grade credit spreads and tier one hybrid spreads,” Frearson says.

Institutional-grade investment for yield hunters

High investor confidence and positive market conditions have facilitated the growth in the universe of asset-backed credit LITs and credit notes. One such note is RAMHA, which provides investors with direct access to Australian mortgage credit exposure, which is typically only available to institutional investors.

"RAMHA is structured as a senior note secured note offering monthly income with added protection in the form of RAM’s first-loss contribution and conservative credit policies used in the assessment of the underlying mortgages," Frearson says.

This portfolio has been externally assessed by Moody's to be in the A range. This is the first listed note to come to market that has had its implied credit risk independently assessed rather than marketing its own homework, making RAMHA a true investment-grade fixed income replacement for investors. It is notable as the first senior secured offering of this type – other peers have focused on subordinated debt notes which have also been popular with investors.

RAM is providing $10m “first-loss” subordinated capital, which means that RAM takes on initial losses before other investors would be affected. In terms of the conservative credit policies, all the underlying mortgages are issued by RAM’s wholly owned non-bank lender, Brighten, and are tightly controlled. 

The average LVR of the pool is around 65%, meaning 35% equity as a measure of protection to investors, in addition to the subordinated capital in the structure. This tight mandate also protects investors as it means there is no potential for development loans, corporate debt, fund leverage or offshore investments.

All the underlying mortgages are “first registered mortgages” – that is, the primary loan on the property, not a second mortgage and meaning that these loans have top priority for repayment in a default.

Frearson notes that over Brighten’s track record, “there’s never been a loss and arrears have been lower than industry peers over the last eight years which is testament to the investment-grade quality of the underlying pool and the conservative assessment processes”.

Brighten has also built out three public RMBS programmes supported by over 35 institutional investors, which are drawn from Australia, UK, Europe, Asia and the US. To date, it has raised over $4.3 billion from those institutional investors via eight RMBS deals. This is important to investors because it highlights RAM Group’s track record as a repeat issuer in mortgage-backed debt capital markets with warehouse funding capacity to call bonds at step-up dates.

How investors should approach income-generating credit

Frearson expects demand to continue in this space and explains that the structure with a focus on capital protection, monthly income and legal maturity is suitable for a range of investors, including retirees.

An investment like RAMHA would typically sit in the income section of a diversified portfolio, though investors should be careful to do their due diligence on all asset-backed investments – quality matters.

As Frearson says, and this can apply to any investment – high yield or otherwise, “there can be big differences in underlying assets and therefore, the risks investors are exposed to. 

"Quality matters, knowing what you are invested in and the risks, where the relative value sits and the track record of the manager in the space you are looking at, such as loans, can make a big difference to the investment and what it means for your portfolio.”

With markets at record highs and uncertainty always at play, it’s a timely reminder of the importance of fundamentals and careful portfolio management.