Pimco Seeks Profit From Australia Mortgage Debt as European Investors Sell - Bloomberg 23/12/10 12:28 PM

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Pacific Investment Management Co., which manages the Lufthansa's New CEO Faces Strategy
world’s biggest bond fund, is buying Australian notes backed Plan

by home loans in the secondary market to profit from higher Rate These Stories
yields as European investors dump the bonds.
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Pimco’s Australian unit, which manages about A$32 billion

($31.9 billion), bought AAA rated residential mortgage-backed
securities this month yielding as much as 165 basis points
more than the bank bill swap rate, Robert Mead, Sydney-
based head of portfolio management, said in an interview.
New bond sales pay about 110 basis points, or 1.1 percentage
points, he said.

House prices in Australia have risen 20
percent since the start of 2009, according to
the statistics bureau. Photographer: Carla
Gottgens/Bloomberg
“We think the cheapest asset across Australian fixed- income
is secondary market RMBS,” Mead said. “Distressed areas of
Europe are now net sellers of Australian RMBS, which we are
benefiting from.”

As much as a quarter of the RMBS sold annually by Australian

lenders between 2002 and 2007 was denominated in euros to
attract European investors, according to data from Standard &
Poor’s. The region is now battling a sovereign debt crisis that’s
seen Greece and Ireland accept financial bailouts and forced
ANZ Bank, Australia’s third-largest bank by
market value, paid a 70 basis-point spread to the European Union to create a 750 billion-euro ($988 billion)
sell A$100 million of three-year bonds last emergency fund.
month, according to data compiled by
Bloomberg. Photographer: Sergio
Dionisio/Bloomberg Moody’s Investors Service lowered Ireland’s credit rating five
levels to Baa1 from Aa2 on Dec. 17, with further downgrades
possible, as the government struggles to contain losses in the country’s banking system.
Moody’s said last week it may lower Spain from Aa1 and also placed Greece’s Ba1 rating on
review for a possible downgrade.

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Pimco Seeks Profit From Australia Mortgage Debt as European Investors Sell - Bloomberg 23/12/10 12:28 PM

‘Selling Priorities’ Market Snapshot

U.S. Europe Asia
When institutions are undercapitalized and don’t have access to new sources of funding, they
NIKKEI 10346.50 -24.
“need to sell assets to reduce their balance sheet size,” Mead said. “They often focus on high
dollar price, liquid assets as selling priorities.” TOPIX 905.78 -0.

HANG SENG 23104.40 +59

Many offshore structured investment vehicles, which made up a “sizeable share of the
international investor base” for Australian RMBS before the 2007 credit freeze, were forced to Stocks on the Move

liquidate their portfolios during the crisis and sell the notes on the secondary market, Reserve
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Secondary market RMBS spreads widened to as much as 450 basis points amid the financial
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according to an e-mailed statement last week from Australia & New Zealand Banking Group
Ltd., which helped manage the sale. U.S. Economy: GDP Grew Less Than
Inflation Cooled
House Prices
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ANZ Bank, Australia’s third-largest bank by market value, paid a 70 basis-point spread to sell Advertisements

A$100 million of three-year bonds last month, according to data compiled by Bloomberg.

Pimco bought Australian mortgage bonds denominated in U.S. and local dollars and the euro,
Mead said. The bond investor prefers to buy RMBS in the secondary market because home
owners who borrowed the underlying mortgages which back the notes have proven they can Sponsored Links

meet repayments, he said. Australian Stock Report

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“The nice thing about those securities is that house prices have gone up since, so already www.AustralianStockReport.com.au
conservatively structured loan to valuation ratios have become even more conservative,” he
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House prices in Australia have risen 20 percent since the start of 2009, according to the
statistics bureau. Housing Investments
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Invest.DHA.gov.au

Even as Gerard Minack, a Sydney-based developed markets strategist at Morgan Stanley,

warned in August that homes are about 40 percent overvalued, the Reserve Bank of Australia
said in a June report no rated portions of the nation’s mortgage bonds have suffered a default.

Prices in the established housing market have “cooled” and tracked “broadly sideways” since
June, the RBA said in minutes of its Dec. 7 meeting, released today.

Pimco also sees Australian financial bonds as attractive, and maintains an overweight position
to the nation’s dollar, Mead said.

The currency has gained 11 percent against the greenback this year, the second-best performer
of 16 major currencies tracked by Bloomberg. Financial debt has returned 7.2 percent this
year, according to a Bank of America Merrill Lynch index. The benchmark S&P/ASX 200
http://www.bloomberg.com/news/2010-12-20/pimco-seeks-profit-from-australia-mortgage-debt-as-european-investors-sell.html Page 2 of 4
Pimco Seeks Profit From Australia Mortgage Debt as European Investors Sell - Bloomberg 23/12/10 12:28 PM

year, according to a Bank of America Merrill Lynch index. The benchmark S&P/ASX 200
Index of stocks has returned 2 percent including reinvested dividends, according to data
compiled by Bloomberg.

To contact the reporter on this story: Sarah McDonald in Sydney at

smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net.

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Pimco Seeks Profit From Australia Mortgage Debt as European Investors Sell - Bloomberg 23/12/10 12:28 PM

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