What Is Portfolio Runoff?

Portfolio runoff means assets with a finite term are not repla🐲ced as꧋ they mature.

When the principal invested in a fixed-income security with a set maturity is repaid, the invest💟or must decide whether to reinvest it. When 🐟the proceeds from matured bonds are not reinvested, a portfolio can be said to be in runoff.

Balance Sheet Runoff

For a bank or lender, portfolio runoff can occur if it can't make new loans quickly enough to replace the repaid ones it made previously. Runoff can also occur when early prepayments are allowed or as defaults occur.

In an effort to reduce portfolio runoff, some loans specify prepayment penalties. These provide additional compensation for the lender if the borrower pays off a♉ loan before the end of its term.

Runoff in Investment Portfolios

Fixed-income investments like 澳洲幸运5官方开奖结果体彩网:asset-backed securities (ABS) and 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities (MBS), usually have a fixed maturity date. For MBS, it would be based on the term of 澳洲幸运5官方开奖结果体彩网:mortgages bundled to make up the security.

If c💙ash flow from mortgage-backed securities is not reinvested, the income the portfolio generates will decline.

Federal Reserve Actions

The 澳洲幸运5官方开奖结果体彩网:Federal Reserve bought Treasury debt and mortgage-backed securities in 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE) programs a🦩dopted following the 2008 financial crisis.

To start reducing its balance sheet the Fed doesn't need to sell those securities; it can merely choose not to reinvest some or all of the proceeds as the debt matures and is repaid.

Insurance Portfolio Runoff

Just as a fixed-income investor may choose not to reinvest coupon payments or principal repayments, a 澳洲幸运5官方开奖结果体彩网:reinsurer may choose not to write new policies while waiting for those it previously wrote to expire. Its portfolio would then be in runoff.