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Straight From PIMCO: The Impact of TALF on Structured Credit

Josh Anderson, head of Global ABS Portfolio Management, discusses the benefits and limitations of the U.S. government’s latest Term Asset-Backed Securities Loan Facility (TALF) for structured credit markets, and where PIMCO sees opportunities ahead.

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Text on screen: What's happened in the structured credit markets?

Josh Anderson, Head of Global ABS, Portfolio Management: On March 23rd, the Fed and Treasury announced a series of measures to support financial markets after the dislocation arising from COVID 19.

Shots of U.S. Federal Reserve Building.

Many of these initiatives were new iterations of programs implemented during the 2008 and 2009 financial crisis.

One example of this was the TALF program,

Image of Federal Reserve Chairman Jerome Powell

Text on screen: TALF: Term Asset-Backed Securities Loan Facility

one of the more impactful programs from the Fed and treasury, aimed at promoting credit availability in consumer, commercial mortgage and certain corporate markets.

This program was initially rolled out in March, focusing primarily on Consumer ABS. They've since expanded it to commercial real estate CMBS and then a little bit to corporate CLOs as well. They have not yet expanded to the RMBS sector, and we think there's a better than 50% probability they do expand this program because parts of the mortgage market are under pressure. And self-employed borrowers, as an example, are having trouble getting mortgages.

So expanding TALF into the residential mortgage market would help some of those borrowers.

At the time of the announcement, spreads in these markets were under significant pressure due to forced deleveraging from a variety of levered market participants, primarily REITs and certain hedge funds.

Text on screen: What was the impact?

Similar to TALF 1.0, Since being rolled out, structured credit markets have stabilized and spreads have rebounded from the wides in March. 

Chart: The line graph depicts how spreads have become compressed across senior structured credit since the TALF program was announced. CLOAAA, Prime Auto Fixed AAA (3 yr), Credit Card Fixed AAA (10 yr), Legacy Non-agency RMBS Option ARM and CMBS AAA (10 yr) are mostly steady from January 2017, spiking in March 2020 and now in decline in April 2020.

3-year AAA ABS are roughly 100 bps+ tighter from the wides, but remain 50-100 wider from pre-Covid levels.

Non TALF eligible assets are underperforming relative to TALF eligible assets. But clearly this program has helped overall sentiment across the structures credit markets.

Text on screen: What’s next?

In general, we believe the fundamentals in this market to be quite solid relative to the 2008 and 2009 financial crisis. 

TALF’s announcement has provided support to many of these asset classes already and we believe they will remain well supported by demand for high quality spread. 

Shot of a neighborhood and shot of skyscrapers.

Program details remain fluid and our view on the impact of the program could change if it expanded into residential mortgages, or even expanded its coverage of CMBS, CLO and other ABS sectors.

Similar to the last cycle, PIMCO expects to be a leading participant in this market, particularly given our understanding of many of the underlying asset classes.

Shots of PIMCO employees working.

While there will likely be attractive opportunities to invest in TALF-eligible assets, we generally believe TALF is better as part of a broader mandate versus a standalone strategy.

Shot of a screen with trading information on it.

Identifying bonds with the potential for spread compression may be key to maximizing returns, as levered yields alone are unlikely to be as compelling as many initially expected. 

Patience is key in the corporate market as this is where we expect more downgrades, credit events and technical pressures.

Unless mortgages are added to the TALF program, we expect the program to be relatively small and a broader opportunity set, including CLOs, bank loans and fallen angels in the high yield market,

Shots of PIMCO employees working.

may offer a better risk adjusted return or a broader opportunity set.

For more insights and information visit pimco.com

Disclosure


Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963) and PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch and Spanish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act and the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. 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CMR2020-0511-1177198

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