The Departure Of Bill Gross From Pimco Has Contributed To The Falling Of US Mortgage Rates
While the concerning worldwide news of European and Asian economic unrest have been causing mortgage rates to drop to low levels, the departure of Bill Gross from Pimco may have further accelerated the falling trend of rates that can be seen across the US.
What is happening?
Pimco is the world’s most important bond manager, and the fact that Bill Gross has just left it after 43 of reigning is surely affecting the mortgage market. His departure may affect the mortgage rates that Americans have to pay, as this will be one of the effects that will ripple across the financial system.
It is well known that the yields on government-backed mortgage securities decrease as bonds purchases rise. Not only have the recent stock selloffs and the increasing purchases of bonds caused treasury yields to fall, but Bill Gross’s departure is speculated to increase demand for mortgage loans. These combined effects have caused mortgage rates to fall to their lowest levels in 16 months, since last year’s June. As treasury yields decrease, so do mortgage rates follow that trend, and the mortgage bond rally has affected the rate on a 30 year fixed-rate mortgage from Freddie Mac to drop down to 4.12 percent, which is a huge difference from the 4.53 percent at the start of this year.
The effect of Bill Gross’s departure from Pimco
Under Bill Gross’s leadership, the flagship of the bond manager giant Pimco – Total Refund Fund – had been underinvested in agency mortgage-backed securities, especially when comparing it with other more indexed funds. The underinvestment in mortgage-backed securities brought negative or neutral returns in the second quarter. The fund had a total of 225 billion dollars out of which 22 percent was invested in both agency and non-agency mortgage-backed securities. This was quite low compared to the 29 percent invested by the Barclays Aggregate Bond Index just in agency mortgage-backed securities.
Even though the investments of the Total Refund Fund are just a fraction of the 6 trillion dollar market in agency mortgage-backed securities, most economical experts believe that the events that took place at Pimco could impact the mortgage market significantly. Some investors believe that if the Total Refund Fund were to shift its position into a more neutral one on the market that would require it to spend billions of dollars on agency mortgage-backed securities, a thing which would also increase their prices and cause mortgage rates to fall even more.
On the other hand, there are also investors who believe that Bill Gross’s departure will cause funds to fly out of Pimco and land into other funds which are more indexed. That would however have the same effect – mortgage-backed security prices would go up, mortgage rates would fall.
Regardless of the speculations, the fact that US interest rates have fallen to their lowest in the last 16 months is a fact. Whether Bill Gross’s departure from Pimco will have the impact many investors predict is still open to debate.