Pimco sees 'hidden' value in mortgages that lured record to ETF

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As the hunt for yield intensifies, investors including Pacific Investment Management Co. see an attractive opportunity in mortgage bonds.

The appetite for the securities has been so strong lately that an exchange-traded fund tracking the industry had its biggest inflow ever. State Street Corp.'s SPDR Portfolio Mortgage Backed Bond ETF, ticker SPMB, had an intake of about $399 million on Feb. 12, topping its previous record of $360 million that was set just the day before, according to data compiled by Bloomberg. The $1.6 billion fund is also on track for the strongest week of inflows in its history.

Renewed concerns about the already fragile global economy are supporting a shift lower in bond yields. While the U.S.-China trade conflict was the main cause of worries in recent months, the deadly coronavirus is now taking center stage. With Treasury rates hovering near multiyear lows, higher-yielding mortgage bonds are an attractive alternative, according to Pimco's Erin Browne.

"Agency mortgages are a good substitute for Treasuries — higher yield and better valuations," said Browne, a global multi-asset portfolio manager at the firm. "We think those are hidden pockets of opportunity that the market isn't focused on and something we really like right now."

Nonagency mortgages also offer an appealing alternative to corporate credit, given that they generally come with less leverage and better balance sheets, Browne said.

Mortgage-backed ETFs have attracted $4.7 billion so far this year, while inflows into mortgage-related mutual funds have totaled $4.2 billion in the span, according to Refinitiv Lipper.

Investors are piling into the industry even as a wave of refinancings looms in the months ahead. That could crimp performance for the mortgage-backed securities market.

Bloomberg News