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Text on screen: What makes securitized markets attractive today?
Text on screen: Daniel Hyman, Portfolio Manager, Agency Mortgages
Agency mortgages, when you look at their returns across the full business cycle, have, one, delivered returns better than Treasuries across the full cycle. But importantly, they've delivered their best returns even in recessions. So when you think about that fixed income anchor in a portfolio, something that's supposed to be a diversifier, agency mortgages have been a true diversifier in portfolios.
Second, when we think about the opportunity set today, agency mortgages are historically cheap, or the spread is historically wide, presenting an opportunity for investors.
When you look at the market today,
Text on screen: Opportunities: quality, liquidity, and yield
Images on screen: Residential neighborhood
what we see is an opportunity for investors to go up in credit quality – government-backed Fannie, Freddie, Ginnie Mae securities – up in liquidity – this is one of the most liquid markets in the world, and pick up yield.
Text on screen: How do active managers pursue durable alpha in securitized markets?
Securitized markets have given investors opportunities year in and year out to add value, add alpha above and beyond benchmark returns. One of the things that is unique within the securitized markets is that when you look at, say, the agency market, a $10 trillion market, more than half of the participants in that market are not focused on the total return of bonds. They're investing in there for different reasons.
Images on screen: The Federal Reserve
So a great example would be the Federal Reserve. The Federal Reserve does not care about total return. They're utilizing the market to implement monetary policy. So thinking back to COVID, you had a big dislocation. You had liquidity problems in markets. And the Fed stepped in and said, "We're going to buy a lot of mortgages.”
That's also creating an opportunity today. This is a little bit nuanced, but if you look at how the Fed is engaged in quantitative tightening, what it is doing is creating another dislocation. It's cheapening newer issued mortgages and leaving older issued mortgages more expensive.
Text on screen: Agency MBS may provide attractive starting yields plus total return potential as spreads normalize
Images on screen: Residential neighborhoods
And so when we look at mortgage-backed securities, we see attractive starting yields plus total return potential, so making money from the normalization of those spreads. So great opportunity in mortgages today:
Images on screen: PIMCO trade floor
a chance for investors to go up in quality, increase liquidity and pick up yield.
Text on screen: For more insights and information visit pimco.com
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Disclosure
A word about risk: All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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