Investor's wiki

Portfolio Runoff

Portfolio Runoff

What Is Portfolio Runoff?

Portfolio runoff means assets with a finite term are not supplanted as they mature.

At the point when the principal invested in a fixed-income security with a set maturity is reimbursed, the investor must choose whether to reinvest it. At the point when the proceeds from matured bonds are not reinvested, a portfolio can be supposed to be in runoff.

Balance Sheet Runoff

For a bank or lender, portfolio runoff can happen on the off chance that it can't make new loans rapidly to the point of supplanting the reimbursed ones it made beforehand. Runoff can likewise happen when early prepayments are permitted or as defaults happen.

Banks can experience runoff when people and organizations pull out capital to invest in other more lucrative investments, consequently diminishing the bank's total capital.

With an end goal to reduce portfolio runoff, a few loans indicate prepayment penalties. These give extra compensation to the lender on the off chance that the borrower takes care of a loan before the finish of its term.

Runoff in Investment Portfolios

Fixed-income investments like asset-backed securities (ABS) and mortgage-backed securities (MBS), ordinarily have a fixed maturity date. For MBS, it would be based on the term of mortgages packaged to make up the security.

In the event that cash flow from mortgage-backed securities isn't reinvested, the income the portfolio creates will decline.

Federal Reserve Actions

The Federal Reserve bought Treasury debt and mortgage-backed securities in quantitative easing (QE) programs adopted following the 2008 financial crisis.

To begin lessening its balance sheet the Fed doesn't have to sell those securities; it can only decide not to reinvest some or all of the proceeds as the debt matures and is reimbursed.

Insurance Portfolio Runoff

Similarly as a fixed-income investor might decide not to reinvest coupon payments or principal repayments, a reinsurer may decide not to compose new policies while waiting for those it recently wrote to terminate. Its portfolio would then be in runoff.

Features

  • Portfolio runoff depicts a decline in fixed-term investment assets.
  • Portfolio runoff can permit the Federal Reserve to reduce its balance sheet without selling holdings.
  • Investment returns decline over the long run in a portfolio runoff as the asset base generating returns recoils.
  • Portfolio runoff can happen when proceeds from developing fixed-term securities are not reinvested.