Agency mortgage-backed securities, which are issued by one of three quasi-governmental agencies, is also an interesting area. Prices have done a round trip. As markets seized during the first quarter of 2020, agency MBS prices became very attractive and we added above-average exposure.
This position worked well in the remainder of 2020 when the Fed proceeded to aggressively buy a significant portion of the available supply of agency MBS, driving spreads to tight levels where we sold a lot of that exposure (at least indirectly) back to the Federal Reserve.
More recently, amid concerns about central banks selling mortgages back into the market, spreads have widened and we are steadily adding back this risk.
We're also actively trading this book and seeking to generate other forms of incremental return through selection of securities, coupons and maturities.
We think if inflation remains elevated, agency mortgage spreads can widen even further.
This sector presents an exciting opportunity to generate value, improve the portfolio’s downside risk profile and, through active trading, seek to generate additional return.
FTA: Are emerging markets attractive right now, given the price of commodities is high?
Pimco: We expect emerging markets to offer good opportunities, while we stress the importance of active investment to sort between the likely winners and losers in a difficult investment environment.
Some countries should benefit from demand for capital goods, and commodity exporters may benefit from improved terms of trade.
At the same time, other EM countries with weak fundamentals and policy frameworks may be further exposed in a world of shorter cycles and higher macro volatility. Commodity importers may also face significant challenges.
FTA: How have you responded to this dynamic within the GIS Income Fund?
Pimco: Within the emerging markets asset class, we look for prudent sources of diversification or additional return, but we usually operate in the higher-quality, more liquid segments of the market: sovereign risk, quasi-sovereign risk, and currencies of higher-quality countries.
We have little emerging market corporate credit exposure, and little local rates exposure, particularly in less liquid areas.
Over the last several months, we have reduced our exposure to emerging markets. Specifically, we pared back exposure to Asia, particularly to China and to Latin America.
We have had little exposure to eastern Europe and we continue to avoid that part of the world because it is inconsistent with the liquidity and volatility profile of the strategy.
Our allocation focuses on higher-quality areas, including Brazil and Mexico, with small positions in South Africa and Israel.
carmen.reichman@ft.com
