(Bloomberg News) Mortgage securities are drawing buyers after tumbling last year and handing billionaire hedge fund manager John Paulson his first loss in the bond market.

Paulson, who made $15 billion in 2007 betting against U.S. subprime mortgages, is sticking with bullish investments in residential and commercial mortgage securities, helping his Credit Opportunities Ltd. fund gain about 1 percent last quarter to narrow its 2011 decline to 18 percent.

Renewed demand is helping to fuel a rebound that's allowing the Federal Reserve Bank of New York to attract buyers for bonds it took over during the rescue of American International Group Inc. in 2008. It dropped efforts in June to sell that debt after sending prices tumbling in credit markets. Neuberger Berman Group LLC, Pine River Capital Management LP and Metacapital Management LP also see value in the $1.1 trillion market for non-agency debt, or home-loan bonds without government backing.

"Investors can make attractive returns without any improvement in the economic landscape," said Troy Gayeski, who helps invest $3 billion of client money in hedge funds at SkyBridge Capital LLC in New York. "It's the second-most compelling opportunity for hedge funds by far," trailing only speculation on the pace of repayments in mortgage securities backed by the U.S. government.

One benchmark gauge of commercial-mortgage debt has jumped 6.6 cents to 63.2 cents on the dollar this year, up from 46.6 in October, and subprime residential bonds are poised for a third month of gains, according to Markit Group Ltd. and Barclays Capital data.

Some mortgage securities slumped more than 30 percent from first-quarter highs after the Fed sold about $10 billion in face value of debt once owned by New York-based insurer AIG, Wall Street dealers curbed risk-taking and Europe's fiscal crisis roiled markets.

A potential buyer for a block of the AIG-related debt approached the Fed, which may hold a one-time auction for about $7 billion of the securities, two people familiar with the matter said yesterday. The assets, held by a vehicle called Maiden Lane II, had dwindled to about $21 billion when the auctions were halted.

While non-agency securities may fall further if Europe's banks need to sell assets, in "a doomsday scenario" of home prices declining as much as 30 percent and unemployment reaching 20 percent, the bonds are priced so low an investor could probably avoid losses by holding to maturity, Gayeski said.

Home prices will drop 1 percent in 2012, according to a forecast by Freddie Mac, which along with Fannie Mae and Ginnie Mae guarantee so-called agency mortgage bonds with government backing. An S&P/Case-Shiller index of values in 20 cities slid 3.4 percent in the year through October to 32 percent below its 2006 peak. Unemployment fell to 8.5 percent in December, the least since February 2009, from 10 percent that year.

Paulson, 56, started buying top-rated residential debt in late 2008 and similar commercial-mortgage bonds around April 2009. His credit fund, which also invests in high-yield, high- risk corporate bonds and loans, gained 591 percent in 2007 on bets against subprime mortgages. It returned 20 percent in 2010 and hadn't posted a losing year since inception in 2006.