The wreckage that is much of the private-party residential mortgage-backed securities market is bound at some point to become a “high yield” playground for distressed debt investors; and a published report on Wednesday suggests that PIMCO, the biggest manager of bond funds, is moving now to make sure it doesn’t miss out on the party. Bloomberg News reported that PIMCO is looking to raise $5 billion for the Distressed Senior Credit Opportunities Fund — dubbed “Disco” by market insiders — which will invest in senior and super senior positions in residential and commercial mortgage securities. It’s unclear if investments will include private-party or agency securities, or both; company officials have declined to comment to the press on the fund’s objectives or strategy. PIMCO’s co-chief investment officer Bill Gross has already been betting big on mortgages, using agency securities. The Financial Times reported in late May that Gross had shifted more than 60 percent of the $130 billion PIMCO Total Return fund he manages into agency-backed mortgage debt during the first quarter, a move that vaulted the PIMCO fund’s returns ahead of 99 percent of its peers. The fund had returned 12.6 percent over the past 12 months, according to Morningstar rankings. The Bloomberg article suggests that the “Disco” fund being shopped by PIMCO now is targeting the private-party market, instead. And while the market for distressed mortgages has largely been flooded as of late on the whole loan side of the business, business has been less brisk on the securities side; in fact, HW’s sources suggest trading activity for many RMBS issues has been essentially nil. HW has covered recent growth in the market for distressed whole loans (and, in fact, it’s the cover story for our inaugural print magazine). But news of positioning by PIMCO on securities — rather than whole loans — suggests that the market for junk mortgage bonds may be getting ready for some early movement; our sources in the market have suggested that right now, however, is not that time. “You won’t see securities really start moving until at least the end of the year,” said one source, a trader at a large hedge fund that asked not to be identified in this story. “Whole loan pools out for bid right now have been thin too, but there’s at least there more of a viable market there for now.” Investors in various private-party RMBS deals have simply lost their shirts over the past year, as downgrades and shattered market confidence have laid waste to even AAA-rated securities; in the subprime and Alt-A sector, in particular, the hits have come swift and hard. Until investors get a better read on collateral risk, we’re told, distressed debt investors won’t jump headlong into mortgage securities — at least, not those trading without a Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae prefix on them. The Bloomberg report also indicated that the PIMCO fund will target commercial mortgage securities, as well. Disclosure: The author was long FRE and held no other relevant positions when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
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