{"id":89615,"date":"2024-02-04T06:43:44","date_gmt":"2024-02-04T11:43:44","guid":{"rendered":"https:\/\/ifintechworld.com\/?p=89615"},"modified":"2024-02-04T06:43:46","modified_gmt":"2024-02-04T11:43:46","slug":"pimco-spots-opportunity-in-mortgages-as-fed-considers-when-to-stop-shrinking-its-balance-sheet","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=89615","title":{"rendered":"Pimco spots opportunity in mortgages as Fed considers when to stop shrinking its balance sheet"},"content":{"rendered":"
\n

Bond giant Pimco sees upside in the estimated $9 trillion agency mortgage-bond market as the Federal Reserve begins thinking about when to stop shrinking its balance sheet.<\/p>\n

Mike Cudzil, a fixed-income portfolio manager at Pimco, expects a more favorable backdrop for mortgage bonds to take shape this year, especially if the Fed cuts rates and no longer lets its balance sheet decline.<\/p>\n

\n

Agency mortgage-bonds have rallied less than other risk assets after extreme bond-market volatility took hold of markets when Silicon Valley Bank collapsed in March and again in October as the Fed signaled it may need to keep rates higher for longer. <\/p>\n

The recovery has been largely held back because the Fed and banks \u2014 two of the sector\u2019s biggest players \u2014 have been all but sidelined since U.S. financial conditions have tightened. <\/p>\n

Read:<\/strong> Homes are expensive right now, but these mortgage bonds look cheap<\/p>\n

After a strong fourth quarter, weakness has again gripped the bond market, with the ICE BofA US Mortgage Backed Securities index at a negative 1.6% return on the year through Friday, while several popular exchange-traded funds in the sector also show negative returns to begin 2024, according to FactSet. The iShares MBS ETF
\n MBB
\n was down 1.6% on the year through Friday.<\/p>\n

Cudzil thinks there\u2019s room for improvement in mortgage bonds, especially if the Fed\u2019s large foothold in the U.S. bond market stabilizes, which should help steady benchmark rates. Banks in the fourth quarter also signaled that some lenders have started coming back as buyers.<\/p>\n

\u201cIt\u2019s one of the most attractive assets in fixed-income, relative to its own history, but also other assets, including investment-grade corporates,\u201d Cudzil said of agency mortgage bonds, adding that Pimco is overweight the sector. The fixed-income behemoth had $1.86 trillion of assets under management at year-end.<\/p>\n

His optimism has grown in recent weeks after several Fed officials said they wanted to avoid the mistake of keeping financial conditions tight for too long, particularly as excess liquidity drains from the financial system as the central bank\u2019s balance sheet shrinks.<\/p>\n

See:<\/strong> Fed\u2019s Logan backs first slowing, then gradually ending, balance-sheet runoff<\/p>\n

As one proxy of excess liquidity, the Fed\u2019s overnight reverse repo facility has dropped lately to about $600 billion from a peak of $2.6 trillion about a year ago.<\/p>\n

While Cudzil said there still is \u201ca fair amount of cash in the system,\u201d he now also expects the Fed to dial back quantitative tightening in the second half of this year, with it possibly finishing by year\u2019s end, which \u201cshould be a positive for all fixed-income assets.\u201d<\/p>\n

To achieve a smaller balance sheet, the Fed each month has been letting up to $60 billion in Treasurys and up to $35 billion in agency mortgage-backed securities mature and roll off its balance. <\/p>\n

Cudzil\u2019s base case expectations is for the Fed to first let fewer Treasurys roll off each month, until runoff ends, while caps on its mortgage reductions likely remain steady. Reinvestments that help stabilize the size of the balance sheet would be going back into Treasurys. <\/p>\n

A hiccup to its mortgage-bond reduction plans has been the surge in rates from pandemic lows, which has stalled the housing market as few homeowners sell or refinance, and slows the pace of early bond repayments.<\/p>\n

Read:<\/strong> Home sales sink to a 29-year low in 2023<\/p>\n

The Fed\u2019s balance sheet since 2022 has still fallen to about $7.7 trillion, even though it remains well above its roughly $4 trillion level before the pandemic hit nearly four years ago.<\/p>\n

Fed officials have indicated they eventually want to exit mortgage bonds. The central bank\u2019s huge exposure currently sit around $2.4 trillion. <\/p>\n

Barclays analyst Joseph Abate thinks the Fed could be done tapering its runoff in June or July, which could sees its balance sheet hit a low of $7.2 trillion, and for its size to then stabilize.<\/p>\n

Cudzil at Pimco thinks that\u2019s a reasonable estimate, and envisions a reserves regime, with a buffer, that would be roughly in the $2.5 trillion to $3 trillion range. <\/p>\n

\u201cThe real risk is the one that\u2019s not priced into the market,\u201d Cudzil said, adding that a reacceleration of the U.S. economy or inflation could still pose threats.<\/p>\n

\u201cThat would be something quite disruptive and challenging for agency MBS,\u201d he said.<\/p>\n

Stocks
\n SPX<\/p>\n

DJIA
\n were higher on Friday, heading mostly for weekly gains, while the 10-year Treasury yield
\n BX:TMUBMUSD10Y
\n was back up to 4.17%.<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Bond giant Pimco sees upside in the estimated $9 trillion agency mortgage-bond market as the Federal Reserve begins thinking about when to stop shrinking its balance sheet. Mike Cudzil, a fixed-income portfolio manager at Pimco, expects a more favorable backdrop for mortgage bonds to take shape this year, especially if the Fed cuts rates and […]<\/p>\n","protected":false},"author":1,"featured_media":89616,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-89615","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\nPimco spots opportunity in mortgages as Fed considers when to stop shrinking its balance sheet | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Bond giant Pimco sees upside in the estimated $9 trillion agency mortgage-bond market as the Federal Reserve begins thinking about when to stop shrinking\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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