Risky subprime bonds making a comeback

By Dow Jones Newswires-Wall Street Journal
Posted April 1 at 9:46 a.m.

Subprime and other residential mortgage bonds that helped trigger the financial crisis are back in vogue with long-term investors, in the latest sign that American credit markets are healing after the worst downturn in a generation.

The prices on a representative slice of the subprime bond market have doubled from 30 cents on the dollar at the low point of the crisis to roughly 60 cents now.

Their comeback underscores how investors have regained the courage to take on more risk as the economy recovers, pushing up the prices of a broad swath of riskier assets, from commodities to junk bonds to stocks.

On Thursday, the stock market ended its best first quarter since 1999, with the Dow Jones Industrial Average closing up 6.41 percent on the quarter. A positive first quarter bodes well for the full year, with the market posting annual gains 81 percent of the time.

The attraction of bonds underpinned by subprime home mortgages is fat yields, at a time when the Federal Reserve has pushed interest rates on the safest investments to among the lowest levels in history.

In addition to subprime bonds, conservative investors are re-entering the market for other so-called nonagency bonds, or those not backed by Fannie Mae or Freddie Mac. These securities yielded close to 20 percent in the downturn and are now fetching 5 to 7 percent — still well above roughly 3.5 percent yields on U.S government bonds and 4 percent on top-quality corporate bonds.

The willingness to take on risk is helping ordinary borrowers, too, by leading banks to make more nontraditional loans, such as jumbo mortgages, and to charge lower interest rates for them. Since the worst of the crisis, the extra amount that borrowers have had to pay for these loans has fallen by half, with interest rates for jumbo loans now roughly 5.5 percent compared to 5 percent for 30-year conforming loans. The extra amount over standard conforming loans that a person would have to pay for a jumbo has fallen from 1.3  points to a bit over 0.5 points.

Equally notable, investors say, is that prices on these risky bonds have stabilized in recent months, giving conservative buyers the confidence to step in.

The demand is so strong for these securities that even the Federal Reserve is taking advantage, announcing Wednesday that it will sell off billions of dollars worth of subprime mortgage bonds it took on as part of its bailout of American International Group Inc. in 2008.

Subprime bonds are securities backed by hundreds or thousands of loans to homeowners with spotty credit profiles.

Read more about the topics in this post: ,

One comment:

  1. Labor on this April 1 at 11:08 a.m.

    You have to be kidding me.!
    What on earth or why on earth are these bonds back

    this is precisely why we are all in this mess to begin with
    of all the regulations sub prime comes marching back in
    never ever thought i would see the day
    wake up america
    did we not learn our lessen that we are all still feeling