The CMBX.NA.AJ.4, tied to classes of originally AAA rated commercial debt most exposed to losses, has jumped 16.6 cents to 63.2 cents on the dollar since Oct. 18, after dropping from 84.8 in February, according to Markit, the index administrator.
Commercial-mortgage debt is beating residential because more securities tied to offices, shopping malls and skyscrapers retain investment-grade ratings, said Steven Delaney, an equity analyst at JMP Securities LLC who covers real estate investment trusts. That widens the pool of potential investors, he said.
Non-agency securities are more attractive to investors able to hold them to maturity than high-yield corporate debt because they're better priced to withstand an economic slowdown, said Pacific Investment Management Co.'s Dan Ivascyn, who manages the $6.5 billion Pimco Income Fund in Newport Beach, California.
"Most market participants think this sector is cheap versus other credit that's rallied a bit," said Ivascyn, who also helps run Pimco's private funds that target mortgage debt. "The key is, we're talking about on hold-to-maturity basis, because if you have a major macro shock in the meantime, they can trade down a lot."
The securities generally offer "high-single digit" yields even in a scenario where homes prices decline 10 percent, he said.
Subprime debt offers yields of 12 percent to 13 percent assuming 80 percent of the underlying borrowers default with recoveries of 25 percent, said Steve Kuhn, head of fixed-income trading at Minnetonka, Minnesota-based Pine River Capital, on Bloomberg Television on Dec. 13. The firm oversees $5.4 billion.
High-yield company bonds, ranked below Baa3 by Moody's Investors Service and less than BBB- by Standard & Poor's, are yielding 8.3 percent after declining from 10.2 percent in October, according to Bank of America Merrill Lynch index data.
Metacapital, whose almost $900 million mortgage-focused hedge fund returned about 23 percent in 2011, is looking for opportunities in non-agency securities after last year remaining "very light in the sector," said Deepak Narula, the New York- based firm's head. The bonds "have cheapened to more reasonable levels" and offer diversification to bets on refinancing, he said.
Mortgage bonds have a higher risk of price declines when there are sellers than corporate securities because fewer investors have the tools to evaluate them, Ivascyn said.
European banks that may need to sell assets to bolster capital hold as much as 249 billion euros ($319 billion) of dollar-denominated securitized debt, including more than 60 billion euros of non-agency securities and as much as 21.7 billion euro of commercial mortgage bonds, Morgan Stanley estimated in a November report.