Subprime Angst Fades As 12% Return Trounces Junk

Fewer Bonds

Dwindling supply has also supported values of so-called non-agency mortgage bonds. Since the crisis, issuance has been limited to a small slice of the safest big home loans and pools of soured or once-delinquent borrowings. The amount of non- agency bonds has fallen to less than $720 billion, from more than $2.3 trillion in 2007, according to Fed data.

“It’s going away, there’s a dedicated buyer base and there’s strong fundamentals,” said Carl Bell, the Durham, North Carolina-based deputy chief investment officer at Amundi Smith Breeden, the U.S. unit of the money manager that oversees more than $1 trillion globally.

Rising home prices have also decreased the number of borrowers who owe more than their homes are worth, which reduces the risk that they may just walk away from their obligations. Less than 17 percent of homeowners have mortgages that were under water in the third quarter, down from as many as 31.4 percent in 2012, according to online real estate advertiser Zillow Inc.

‘Positive’ Data

U.S. economic data is also showing continued strengthening as small-business surveys point to more workers on the cusp of bigger wage increases, said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC.

“The data has been uniformly positive,” Porcelli said at a Dec. 12 press event in New York. Lower fuel costs will also bolster consumer spending, he said.

Gary Singleterry, an investment director at Swiss money manager GAM Holding AG, who specializes in mortgage- and asset- backed securities, said there’s value in non-agency bonds partly because he can invest in securities with floating yields that stand to benefit when the Fed raises rates.

More than 90 percent of purchases made this year by his firm’s about $500 million of mortgage-focused accounts have been of debt without government backing, he said.

The subprime bonds have also rallied as hedge-fund managers speculate on the likelihood that lenders will make payments after misrepresenting loan quality. Investors also may get reimbursements from other parties to deals such as trustees, which are being sued on more 54 percent of all transactions from 2004 to 2008, according to a report by Deutsche Bank AG.