Securitized Credit: Tapping Into Attractive Valuations
Text on screen: PIMCO
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Text on screen: DANIEL H. HYMAN, Head of Agency MBS Portfolio Management
Dan: Looking at fixed income markets today, we see good opportunities in both government guaranteed mortgages and securitized credit. We like the government guaranteed mortgage market
Text on screen: TITLE – Three reasons why PIMCO sees value in agency mortgage-backed securities (MBS): BULLETS – Attractive valuations, Abundant relative value opportunities, High quality spreads over U.S. Treasuries
for three reasons. First, valuations are attractive. Second, relative value opportunities are plentiful. And third, government guaranteed mortgages offer investors a spread over US treasuries with a low correlation to the business cycle.
Looking today at valuations in the government guaranteed mortgage market, they're historically very attractive, meaning investors, the yield they receive to own a government guaranteed mortgage over a government guaranteed treasury, is historically high.
Additionally, when we look at the opportunities within the sector, there are opportunities for managers like us to add value trading relative value.
For example, when we look at lower coupons today, they look historically expensive relative to higher coupons. This is a direct impact of the Fed's purchase program.
Text on screen: Owning higher coupon vs. lower coupon agency MBS may add alpha to portfolios over time
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So for active managers we can own more higher coupons relative to lower coupons and add alpha to portfolios over time.
And lastly, diversification from the business cycle. When we look back at historic returns, unlike credit sectors which tend to have a very high correlation to the business cycle, underperforming in recessions, and outperforming in expansions,
Text on screen: Agency MBS offer a low correlation to the business cycle
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government guaranteed mortgages have exhibited a very low correlation. And with today's economic outlook uncertain, we think government guaranteed mortgages offer an attractive place to position portfolios.
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