Smart money pares back mortgages

August 12, 2009

Follow the money, or at least the smart money.  Bloomberg reports that PIMCO, the giant bond fund, has substantially cut back its holdings of mortgage in its $169 billion Total Return Fund.  At 47% of the portfolio in July, it’s well below the 86% seen in February before the Fed expanded its MBS purchase program in March.

At the FOMC meeting that concludes today, policymakers are expected to decide to let the Treasury purchase program die a natural death in September, when it’s due to expire. The mortgage program could be next. The MBS purchases, which already stand at $721 billion but could go as high as $1.25 trillion, is slated to stop at the end of the year.

When the Fed steps away from MBS, expect valuations to take a hit. PIMCO most likely does and is already positioning for it.

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