PIMCO urges caution regarding the burgeoning Synthetic Risk Transfer (SRT) market. This tool is increasingly used by Banks to transfer risk and enhance lending capacity.

Pimco portfolio manager Kris Kraus and others included SRT in the area of asset-backed financing that requires caution this week in their report, "because there are significant capital formation or latent risks yet to be tested."

European Banks and an increasing number of Banks in the USA are using SRT, also known as Significant Risk Transfer, to transfer loan assessment risks to investors, thus freeing up capital for issuing new loans.

Since last year's regional bank crisis, as U.S. lending institutions rapidly issued these products based on expectations of a tightening regulatory environment, hedge funds and Other investors have flocked to this expanding market.

With the influx of dedicated capital, the valuation of the U.S. SRT market has significantly tightened.

Although SRT can be profitable, it also requires investors to bear the first-loss risk.

While SRT provides an effective avenue for accessing high-quality bank credit, we do not view them as an independent asset class," wrote Kraus, Harin de Silva, and Jason Steiner.

These three portfolio managers are responsible for managing Pimco's asset-backed lending department, which raised $2 billion this year and plays a significant role in the company's development of alternative Business.

Recommended reading: Goldman Sachs, Morgan Stanley, and Bank of America closely examine the leverage usage of SRT buyers.

The portfolio manager at Pimco wrote that asset-backed loans are one of their most Bullish investment themes, but also emphasized that optimism must be kept in check with discipline.