Perspective

Structured credit remains one of the most specialized and often misunderstood segments of fixed income markets. At Easterly Orange, CIO and Senior Portfolio Manager Jay Menozzi focuses on identifying opportunities across securitized assets, including mortgage-backed securities, asset-backed securities, and other structured credit instruments.

Jay brings nearly four decades of experience analyzing complex credit structures and has navigated multiple market cycles, including the 2008 financial crisis and the market dislocation during the COVID-19 pandemic. His approach combines deep structural analysis, disciplined risk management, and security selection, with the goal of generating attractive income while maintaining relatively controlled volatility.

We recently sat down with Jay to discuss his background, how he approaches structured credit investing, and why he believes the asset class continues to offer compelling opportunities for investors.

Can you tell us about your background and how you began working in structured credit?

Jay: I actually started my career as an engineer. After business school, one of my professors encouraged me to join him at a bank and make the transition into finance. One of the classes he taught was on mortgage-backed securities, which at the time were a relatively new and evolving asset class.

It was a very technical market compared to traditional corporate bonds, and there weren’t a lot of established analytics available yet. Given my engineering background, I ended up building models and writing programs to help analyze and value mortgage-backed securities. In a way, I started out as a “financial engineer” before that term was widely used.

Over time, I continued to deepen my experience across mortgage-backed securities and related structured products. Throughout the 1990s, I was managing portfolios that included agency mortgage-backed securities and mortgage derivatives like interest-only strips, principal-only strips, and inverse floaters.

The financial crisis in 2008 was really the point where my focus expanded from agency mortgage-backed securities into structured credit more broadly, particularly non-agency mortgage-backed securities. There was a tremendous amount of distress in the market, but also tremendous opportunity for investors who could properly analyze and understand the underlying credit risk.

For investors who may be less familiar with the space, how would you describe structured credit?

Jay: Structured credit is often used as a broad term, and it’s not always defined the same way by everyone. At its core, it refers to securities created by pooling together underlying assets, things like mortgages, auto loans, credit card receivables, or other types of loans, and then issuing bonds backed by those cash flows.

The original securitized products were agency mortgage-backed securities. Instead of lending money to a single company, you have a pool of assets generating cash flow, and investors purchase bonds that have claims on those cash flows.

What makes the asset class particularly interesting is the structure itself. These deals are organized into different tranches, or layers of bonds, with varying levels of seniority and risk. Senior bonds receive principal and interest payments first, while more junior tranches absorb losses first if problems occur in the underlying collateral.

That structural design is what creates much of the opportunity in the asset class.

How does structured credit differ from traditional corporate bond investing?

Jay: When you invest in a corporate bond, you’re essentially lending money to a single company, so your analysis focuses on the company’s financial health, management team, and ability to repay debt.

Structured credit is different because you’re analyzing pools of assets rather than a single borrower. In many cases, there may be thousands of underlying loans supporting a transaction.

One of the things I’ve always liked about structured credit is that it lends itself well to quantitative analysis. You can model borrower behavior, evaluate the structure itself, and analyze how cash flows move through the transaction.

Because of the cash flow waterfall structure, two bonds backed by the exact same collateral pool can have very different risk profiles. That’s why understanding the structure is just as important as understanding the underlying loans themselves.

Why do you think structured credit is often misunderstood by investors?

Jay: I think part of it is that many investors still view structured credit through the lens of the global financial crisis. Mortgage-related securities became closely associated with what happened in 2008, and that perception has stayed with the market even though the industry has changed significantly since then.

Since the financial crisis, there have been major regulatory and structural changes across the market. Underwriting standards are much more disciplined today, transparency has improved, and the overall structures are generally stronger than they were before the crisis.

At the same time, these securities are still more complex than traditional corporate bonds, and that complexity can discourage investors from spending the time to fully understand the market. But for managers willing to do the analytical work, that complexity can also create opportunity because these sectors are often less efficiently priced than more heavily followed areas of fixed income.

 
What does your investment process look like when evaluating opportunities?

Jay: Our process is very focused on security-level analysis.

We spend a lot of time understanding the underlying collateral, how the loans in the pool are performing, and how different economic scenarios might affect those assets. At the same time, we carefully analyze the structure itself: how cash flows move through the transaction, what protections exist for each tranche, and how much cushion exists before a particular bond would experience losses.

Every bond we buy is effectively its own research project. We analyze it before purchase, negotiate pricing, and then continue to monitor and surveil the position on an ongoing basis after it enters the portfolio.

Because structured credit is such a fragmented and analytically intensive market, security selection becomes incredibly important.

 
How do you think about risk management in this asset class?

Jay: Risk management is central to everything we do.

In fixed income broadly, we think about three major risks: interest rate risk, liquidity risk, and credit risk.

One of my longstanding views is that interest rate forecasting is extremely difficult, so we generally prefer to run portfolios with lower duration and less interest rate sensitivity where possible.

Liquidity risk is also very important in structured credit because these markets are naturally less liquid than Treasuries or corporate bonds. We spend a lot of time managing liquidity carefully at the portfolio level and making sure we maintain flexibility during periods of market stress.

And then there’s credit risk, which ultimately comes down to understanding the underlying collateral on a loan-by-loan basis. We use quantitative models to evaluate projected defaults and losses, and we continuously monitor positions after purchase.

One thing I’ve learned over the years is that avoiding major mistakes is just as important as finding attractive opportunities.

How has navigating multiple market cycles shaped the way you manage portfolios today?

Jay: Living through multiple crises changes the way you think about markets.

I managed portfolios through the mortgage market disruption in 1994, Long-Term Capital Management in 1998, the global financial crisis in 2008, and then COVID in 2020. Each one teaches you humility and gives you a healthy respect for how quickly markets can change.

One thing I’ve learned is that major market dislocations are often preceded by periods of complacency and very tight spreads. When investors are aggressively reaching for yield, we tend to become more defensive and reduce risk rather than stretch for incremental return.

That positioning helped us during COVID. Coming into 2020, we already felt spreads were unusually tight, so we had elevated liquidity levels and a more defensive posture before markets sold off.

Periods like that reinforce the importance of patience, discipline, and maintaining liquidity so you can take advantage of opportunities when markets become dislocated.

How do you view the opportunity set in structured credit today?

Jay: We still believe structured credit remains an attractive area of fixed income, particularly relative to many traditional corporate bond sectors.

One of the reasons is that these markets remain somewhat under-followed and less efficient than areas like investment-grade corporates.

Even when structured credit sectors appear fairly valued relative to their own history, they often still trade at wider spreads than similarly rated corporate bonds.

And because the market is so fragmented, there are often opportunities at the individual security level that careful analysis can uncover. That’s really where we spend most of our time; security selection, understanding the collateral, and identifying opportunities where we believe the market may be mispricing risk.

What role can structured credit play within a broader portfolio?

Jay: I think structured credit can offer a very attractive combination of characteristics for investors.

The asset class can provide relatively attractive income, often with lower duration and lower correlation to equities than many traditional fixed income sectors.

One of our objectives has always been to try to deliver strong risk-adjusted returns by participating meaningfully in positive markets while protecting capital during more difficult environments.

From my perspective, structured credit can potentially serve multiple roles within a portfolio because it can combine relatively high income with lower volatility characteristics than investors often expect.

After nearly four decades in the industry, what continues to motivate you?

Jay: What motivates me is that I still genuinely love the work. Structured credit is an area where you never stop learning. Every market cycle is different, every environment presents new challenges, and the market itself continues to evolve over time. That constant evolution and the need to keep learning, adapting, and thinking critically is what has kept me excited about the business for so many years.

 
I also enjoy building and leading the team. Boris and I have worked together for more than 20 years, and we’ve built a group that shares the same philosophy and approach to investing.

At this stage, a major focus is continuing to strengthen the organization, deepen the investment team, and stay highly focused on the portfolio and the investment process.

Ultimately, the goal is simple: continue refining the process, managing risk carefully, and delivering strong outcomes for investors over the long term.

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