A few major players are buying up bonds tied to subprime mortgages

Goldman and Pimco are betting big that housing prices will go up

TRD New York /
Aug.August 24, 2017 01:30 PM

Single family homes in the U.S. (Credit: Rachel Elaine via Flickr)

Big investors are playing with fire, scooping up bonds tied to subprime mortgages and other home loans made before the recessions, seeking better risk-return rates than corporate junk debt.

Securities backed by mortgages have gained 6.9 percent this year, Bloomberg reported, citing Bank of America data. Companies like Pacific Investment Management Co., Goldman Sachs Asset Management, Columbia Threadneedle and others are now buying bonds tied to subprime mortgages and homes loans made before the dark days of 2008, according to the publication.

“Housing has got legs,” Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co., which manages $1.6 trillion, told the publication. “It’s the sector we probably have the highest conviction on.” He believes housing prices will go up, pushing up non-agency mortgage securities and bonds back by home loans that don’t have government guarantees. If house prices go back, however, the securities will still deliver positive returns.

Mortgage bonds became very unpopular after the housing crisis, and investors switched over to corporate debt because it was considered safer.

Non-agency-mortgage-backed securities has fallen from about $2.8 trillion a decade ago to about $800 billion in the middle of 2017, according to a report by trade group the Securities Industry and Financial Markets Association.

In June, the Federal Reserve announced it will start selling off assets. The Fed bought up $4.5 trillion in bonds and other securities in the wake of the financial crisis in an attempt to stabilize financial markets and push down long-term interest rates. [Bloomberg]Miriam Hall

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