Renewed investor interest in subprime mortgage investments
Investor perception that the U.S. housing market may be on the rebound is supporting renewed interest in once-toxic mortgage bonds that were at the center of the financial crisis, according to a recent Wall Street Journal article. Some distressed mortgage-backed bonds have registered double-digit percentage gains this year. The rally has brought investors back to a market sector that was ravaged between 2007 and 2009.
Last year, many banks and hedge funds lost money in the sector. But subprime mortgage bonds have fallen to such a low level that some investors now feel compelled to jump into the sector.
Subprime bond prices represent “extremely harsh assumptions for how borrowers will behave,” said Jeffery Wheeler, a portfolio manager at Smith Breeden Associates in Durham N.C. Bond yields of 7% to 9% show expectations of high default and delinquency rates, but the actual outcome may not be as bad, he said.
Goldman Sachs Group and Credit Suisse Group recently purchased bonds from the New York Fed with a face value of more than $13 billion. The firms have been reselling the bonds to hedge funds, insurance companies and pension funds that are looking to lock in high interest rate yields for the next several years. The fate of the bonds could hinge on the state of the U.S. economy going forward and the outcome of the European debt crisis.
“The probability of a collapse in housing or another significant leg down has diminished,” said Joshua Anderson, a portfolio manager at Pacific Investment Management Co.
The ABX, an index of credit default swaps that tracks values of subprime debt, is up 14% this year following a decline of 30% from March to November of 2011. The index currently stands at about 50%, nearly twice its all-time low in early 2009.
Subprime mortgages staging a comeback? Depends on your viewpoint (http://aitegroupblog.com/capital-markets/subprime-mortgages-staging-a-comeback-depends-on-your-viewpoint/). Aite Group website accessed February 21, 2012
Toxic? Says who? Taste for ‘subprime’ returns (http://online.wsj.com/article/SB10001424052970204062704577223473258237102.html). WSJ, February 16, 2012