(Jan 13): US efforts to bring down the cost of housing through buying mortgage securities are bolstering a bullish outlook at Pacific Investment Management Co (Pimco), one of the world’s largest bond managers.
“We definitely think it could bring down rates and reduce the spread on mortgage-backed securities,” chief investment officer Daniel Ivascyn told Bloomberg News in an interview.
Pimco sees the announcement as “another tailwind” for their overweight holdings in the debt, which they maintained through 2025.
The mortgage market got a lift at the end of last week after President Donald Trump issued a directive ordering Fannie Mae and Freddie Mac to buy US$200 billion of mortgage bonds, part of an effort to make 30-year fixed rate home loans more affordable.
The Bloomberg MBS index rallied 0.53% on Friday, its best one-day rise since the start of August.
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The government’s announcement “wasn’t the driver behind our ‘overweight’ decision, but it was always one potential catalyst for more aggressive spread tightening,” Ivascyn said.
However, “the long-term problem is that we have too few homes versus the number of households and the only long-term solution will be to increase the housing stock,” he added.
The US 10-year yield — which tends to influence the rate for 30-year fixed rate mortgages — has largely stayed above 4% over the last year, frustrating the Trump Administration’s efforts to bring down the cost of loans.
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The importance of longer-dated rates for the US economy and the cost of home ownership has been regularly highlighted by Treasury Secretary Scott Bessent, while Trump has long insisted that the Federal Reserve should cut interest rates more aggressively.
“This is an administration that will be very creative on the policy side and I think this is an example of their willingness to engage a balance sheet at their disposal,” said Ivascyn.
“To the extent that long rates were to drift higher than what they would like, they certainly have the potential to make outright duration purchases as well,” he said.
Mortgage securities have been cheap relative to corporate and Treasury bonds since the Fed began selling its holdings of mortgages in 2022. That setup saw many fixed income managers load up on mortgages, with the Bloomberg index gaining 8.6% last year in its best annual performance since 2002.
The asset manager “may reduce a bit over time” its overweight in the US$217 billion Pimco income fund should spreads tighten further, he said. The income fund is up 11.6% over the past 12 months and ahead of a majority of rivals, according to data compiled by Bloomberg.
For now, however, “it’s very important to note that mortgages before this announcement were at very attractive valuations relative to corporate bonds, as an example,” Ivascyn said. “Even though mortgages have tightened relative to corporates, they still look reasonably attractive.”
In their latest investment outlook for the next six to 12 months, published on Tuesday, Pimco advocates owning bonds as they “are cheap versus stocks at current valuations”.
- Pimco says that “that robust bond returns don’t depend on a broad rally in rates,” noting that the 10-year yield currently sits near 4.2%, the middle of a 3.5-5% range that has held for the past three years
- They look to “maintain a modest overweight to duration — a gauge of interest rate exposure — with a focus on global diversification. They continue to favour 2- to 5-year bond maturities,” and said, “our curve positioning has grown more balanced as longer term yields have become more attractive”
- In the US, “duration still looks attractive and can help hedge portfolios against a potential slowdown in the US labour market or AI-related equity volatility. European duration looks comparatively less attractive. While Australian duration has underperformed, it remains a useful diversifier within a broader basket”
- Pimco also prefers “countries with higher real policy rates, tighter fiscal settings, and more balanced inflation risks.” This includes the UK and select EM countries such as South Africa and Peru, where yield curves are steeper than domestic fundamentals warrant, and Brazil
- In currencies, Pimco “see the potential for US dollar weakness, reflecting the ongoing Fed easing cycle, secular fiscal concerns, and starting valuations that favour an overweight to EM currencies versus DM counterparts”
- Pimco is sticking with Treasury Inflation-Protected Securities, commodities, and real asset exposures as “despite inflation above central bank targets and near-term risk of reacceleration, longer-term breakevens remain low”
- On credit, Pimco said they have “grown more selective” and “are seeing signs of later-cycle behaviour as strong recent returns have fuelled complacency”
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