UPDATE: Pimco's Ivascyn Sees Value in Residential Mortgages
November 09 2011 - 12:59PM
Dow Jones News
Pacific Investment Management Co., one of the world's largest
bond managers, on Wednesday said reactions to Europe's fiscal
crisis and a weak global economy have opened up opportunities in
some of the riskiest mortgage bonds that have suffered for
months.
Daniel Ivascyn, a senior portfolio manager at Pimco, said
residential and commercial mortgage bonds have been a way to grab
extra yield despite their exposure to the shaky U.S. real estate
markets. They are among "dislocations" in markets created as the
economic concerns rattled markets, he said.
Pimco, which is owned by Allianz SE (ALV.XE), is the latest and
largest manager to underscore the value in private-label
residential mortgage-backed securities, where some prices have
fallen by 25% or more since early 2011.
On top of delinquency and rising foreclosure-related losses, the
market for the non-guaranteed residential mortgage bonds has
suffered as European crises and a teetering global economy led
investors to broadly shun risky debt.
"Although we have a negative view on residential and commercial
real estate fundamentals, and expect weakness in the U.S. economy
going forward, we believe that current trading levels of these
securities already incorporate negative views," Ivascyn said on a
note drafted for the Pimco website.
Ivascyn, who manages the $6 billion Pimco Income Fund (PIMIX),
also underscored the value in floating-rate bank loans and
emerging-market debt as way to add income to the fund as policy
makers keep interest rates low and increased economic uncertainty
fuels a flight-to-quality bid away from risky assets.
The fund has returned 5.58% this year through Tuesday, placing
it in the top 11% of the 254 funds in its category, according to
Morningstar.
Prices on residential mortgage securities backed by prime
adjustable-rate home loans have fallen by 18% since January, while
riskier bonds supported by option-adjustable rate loans have lost
25%, according to Amherst Securities Group. Some subprime bond
indexes have declined about 30%.
After accounting for expected losses, returns on RMBS now range
from 4% to 15% on many senior bonds, Amherst said in a recent
report. That makes them as cheap relative to other bonds as they
have been since the financial crisis in 2008, the analysts
said.
Even so, Ivascyn is stepping into a controversial market where
many see losses accelerating as foreclosures continue, unemployment
hovers around 9% and home prices drift lower. Despite some
stability in other risky sectors--including commercial
mortgage-backed securities--residential loan-backed securities have
foundered because of low broker-dealer demand and possible selling
by banks shedding risk from balance sheets, Amherst and FTN
Financial analysts said in reports this week.
Some hedge funds since September have been ramping up bets
against the bonds backed by prime quality loans with the PrimeX
derivative index.
"It is possible for either fundamentals to be worse than
expected, or technical selling to lead mark-to-market price
declines even if the underlying fundamentals are in-line or better
than expected," Ivascyn said.
But as prices languished, other buyers have emerged. Real estate
investment trusts Two Harbors Investment Corp. (TWO) and Starwood
Property Trust (STWD) both said they boosted holdings of
residential mortgage securities last quarter. West Coast rival TCW
Group has added to its residential mortgage holdings as prices
fell.
In other high-yielding markets, floating-rate bank loans had
been in favor earlier this year as investors sought a hedge that
would benefit if interest-rates rose, Ivascyn said. Instead, rates
dropped and the weaker economy raised the potential of corporate
defaults, he said.
Redemptions by investors this year have forced managers to sell
floating rate loans, as well as emerging market debt, increasing
the appeal of those sectors, he said. Floating rate loans have
"overshot to the downside," he said.
-By Al Yoon, Dow Jones Newswires; 212-416-3216;
albert.yoon@dowjones.com