More than a decade after risky mortgage lending sparked the financial crisis, some of those same products are creating today’s best investment opportunities, Pimco’s group chief investment officer, Dan Ivascyn, said on Tuesday.
The 2008 financial crisis was caused in part by the slide in the value of bonds linked to U.S. home loans that were packaged together and sold to investors.
“When we look at markets we go back to the financial crisis,”Mr. Ivascyn told the Reuters Global Investment Outlook 2020 Summit in New York. “The areas that caused the most damage the last time are the areas we see the most value today.”
Mr. Ivascyn, who oversees Newport Beach, Calif.-based Pimco’s US$1.9-trillion of assets under management, as of Sept. 30, said housing-related segments in the market look attractive and resilient.
Two sectors stand out: relatively recent mortgage-backed securities issued by government-sponsored entities such as Fannie Mae, Freddie Mac and Ginnie Mae, so-called agency MBS and older bonds not backed by the mortgage giants that predate the crisis.
As the U.S. Federal Reserve pivoted toward an easier monetary policy this year and cut interest rates three times, the interest rate on U.S. 30-year fixed-rate mortgages has fallen by more than a full percentage point. That drove a wave of refinancing that helped cheapen mortgage bonds guaranteed by Fannie and Freddie.
Agency MBS yield spreads, a measure of the added compensation demanded by investors to hold securities backed by Fannie and Freddie rather than super-safe U.S. Treasuries, hit their widest in five years in late August, according to Bloomberg Barclays Index data. That has made them highly appealing, in Mr. Ivascyn’s view. Across the globe, more than US$13-trillion bonds have negative yields, according to JPMorgan.
Mr. Ivascyn said the challenge in fixed income now is finding high-quality bonds with superior yields. He says agency MBS fits the bill relative to both European sovereign bonds, many of which sport negative yields, and U.S. Treasuries, which yield less than the rate of inflation.
“For many years the Fed was buying agency mortgages, valuations got taken to extreme, expensive levels,” Mr. Ivascyn said. But with the Fed reducing its balance sheet, “we have begun to see that sector cheapen up and become a very attractive high-quality alternative to a Treasury bond.”
The Fed bought Treasuries and MBS from the end of 2008 to late 2014 in a program known as quantitative easing.
Aside from the GSE-backed sectors, Mr. Ivascyn said he was particularly keen on “non-government-guaranteed, very seasoned, very low risk, collateral in the public and private markets that offers an incremental yield advantage to traditional government bonds.”
“The best collateral you can buy when you can find it is the very seasoned paper that got originated before the financial crisis, and there’s still a decent amount of that on the balance sheet of the federal agencies and on bank balance sheets,” he said.
Mr. Ivascyn said while he does not see the same types of excesses in the market today “that we saw in the years leading up to the financial crisis,” he does have some concerns “on the margin,” in the corporate sector where he sees reduced underwriting standards, higher corporate leverage and less investor protection. That is creeping into other segments of the market like private direct lending markets, he said.
“We do think it’s time to be a bit more cautious and focus on capital preservation liquidity and other defensive techniques,” Mr. Ivascyn said.