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Why the world's largest bond investor is dismissing the yield curve's recession warning



The head of the world's largest bond fund says investors should not read too much into the recessionary signal coming from the U.S. Treasury market.

In an interview with MarketWatch, Daniel Ivascyn, a group chief investment officer of Pacific Investment Management Company, or Pimco, said too many market participants were watching for a downturn by monitoring the twists and turns of the yield curve, which saw The 10-year treasury falls below the 3-month Treasury Bill yield of March 22, marking the first such inversion since 2007.

An inversion of the 10-year / 3-month measure of the curve has been highlighted by researchers.

However, Ivascyn says investors have become overly anxious about recessionary signals, despite evidence that domestic economy remains solid. He said, decelerating U.S. In addition to growing concerns, the investment manager, instead of seeing other factors that have contributed to the phenomenon of long-term yields falling below their short. -term counterparts. He said a combination of technical factors including increased demand for longer-matched Treasuries, because of a sharp uptick in mortgage refinancing applications may have amplified a recent bond-market rally, helping the inversion form even as tight labor market and global growth outlook has yet to point to an imminent end to the US's second-longest expansion since World War II.

Read: The yield curve inverted ̵

1; here are 5 things investors need to know

The catalyst for the yield-curve inversion was lost on market participants with the S & P 500 index

                            
                            
                                  
      
      
      
      
      
      
      
                                  
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falling near 2%, while the Dow Jones Industrial Average

                            
                            
                                  
      
      
      
      
      
      
      
                                  
                                     DJIA, + 0.95%

gave up 1.8% on March 22.

Equity markets have since staged a modest rebound, but the implication of the inversion to markets and the economy has spurred a litany of articles and analysis from market pundits.

This: Yield curve 'overrated as an indicator', says Nobel-winning economist Robert Shiller

Is there a recession in the cards?

Ivascyn says, according to Pimco's own estimation, the risk of a domestic economic contraction this year is limited, even though recent data hint at some weakness taking hold. A final reading of the gross domestic product has indicated in Friday that the U.S. Economy grew at the annual pace of 2.2% in the final three months of 2018, a slower than earlier estimate of 2.6%

Still, the Pimco executive says Treasury investors' increased pessimism over the U.S. economic outlook comes despite the ultralow unemployment rates and the global economy that he believes will be steady in 2019, even if some cracks appeared recently. Pimco is anticipating full-year GDP between 2% and 2.5%, which is roughly in line with the consensus estimates of economists polluted by MarketWatch estimates of 2.3%.

"Given that our unemployment rate is currently [a recession] holding all "If we look at the yield curve shape relative to our economic outlook, [the yield decline] is a bit overdone at least in the short term," he said. Ivascyn said. Responsible for the firm's Income Fund

                            
                            
                                  
      
      
      
      
      
      
      
                                  
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which manages more than $ 115 billion in assets, Ivascyn took over as chief investment officer for Pimco after the acrimonious departure in 2014 of Bill Gross's investment luminary.

The severity of the fall in yields for long-dated government debt has drawn as much investor attention as inversion.

The 10-year Treasury note yield

                            
                            
                                  
      
      
      
      
      
      
      
                                  
                                     TMUBMUSD10Y, + 3.35%

slumped to almost 27 basis points in March to trade at 2.42%, marking its largest monthly decline since Dec. 2018, according to Dow Jones Market Data.

The decline in yields, reflecting higher debt prices, can indicate bond investors anticipating lackluster growth, in turn, and subdued concerns about inflationary pressures that would erode fixed-income gains.

This : Bond market's March madness leaves Treasury yields is track for the largest monthly drop since 2016

Read : This time, the inverted yield curve suggests that the stock market has already peaked, some analysts say

Ivascyn has been credited with refinancing of home loans as at least part of it. of the factor that has underpinned March's bond-market rally.

He explained that as rates-hike expectations have faded, the US Households have moved quickly to take advantage of the decline in fixed-income mortgage rates, which are pegged to benchmark Treasury yields. At current borrowing rates for a 30-year fixed mortgage, around 30% of such home loans are eligible for refinancing based on Pimco's calculations. The current 30-year rate fell to 4.07% last week.

Treasury purchases from real investment trusts, banks and other holders of mortgage-backed securities, reeling from increased prepayments from homeowners rolling over their loans at lower rates, are some of the players involved in these mortgage related trades.

"It's the first time in a while we've seen a big pick-up in these technical flows," Ivascyn said. The Pimco investor knows a mortgage debt claim, having spent his reputation as an asthe investor during the 2008-09 financial crisis, buying up beaten-down mortgage bonds as the mortgage market collapsed.

Also check out : Mortgage rates plunge at the fastest pace in a decade as growth fears resurface

More recently, the uptick in refinancing activity has meant that some of the underlying loans in mortgage-backed securities are being paid off early, shortening the average maturity of their fixed payments and reducing interest earned from the mortgage.

Applications to refinance home mortgages jumped by 12% in the week. In the first half of the year, mortgages on mortgages and mortgages increased. Ending March 27, according to the Mortgage Bankers Association.

Before last week, these so-called negative convexity inflows were considered a thing of the past, a powerful force when the Fed had yet to engage in quantitative easing and had at One point, owned by a third of agency mortgages – meaning those residential mortgage bonds linked to government-linked agencies Fannie Mae and Freddie Mac – outstanding bonds.

Unlike private investors, the central bank does not look to make money from its MBS Holdings and so does not hedge its $ 4 trillion balance sheet against the vagaries of interest rates.

With the housing market staging a return from last year's doldrums, Ivascyn said he was sanguine in mortgage bonds and less interested in corporate debt, a growing popularity amongst yield-hungry investors who anticipate low interest rates across the world will keep borrowing costs low and mute default. New-home sales rose nearly 5% in February to an annual pace of 667,000, a 11-month high.

Based in Newport Beach, Pimco managed around $ 1.7 trillion at the end of 2018.

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