U.S. home loan bonds without government backing, including 2007 subprime securities with 92% of borrowers projected to default, are better bets than other debt, according to Barclays Capital Inc. analysts.
That's because the originally triple-A-rated subprime-mortgage securities at current prices from 25 cents to 35 cents on the dollar offer yields of 7% to 8%, after considering likely losses of 73% on the remaining loan pools, the analysts wrote in an Aug. 21 report. Depending on the category, some 2007-vintage nonagency mortgage securities offer projected yields up to 16%, they said.
"We have come a long way from March price levels and are increasingly uncomfortable recommending outright longs," Sandeep Bordia, Jasraj Vaidya and Sandipan Deb, the analysts, wrote. "That said, nonagencies still yield higher returns than most comparable sectors."
Nonagency mortgage-bond prices weakened last week, after being unchanged the previous week as Wall Street banks continued purchases started during a six-week rally. For example, the senior-most securities tied to fixed-rate prime-jumbo mortgages fell 2 cents on the dollar, to 83 cents, Barclays data shows. The debt rose from 78 cents in early July and 63 cents in March.
The securities have soared from record lows as debt investors reduced the yields they targeted amid signs that the deepest housing slump, worst financial crisis and longest U.S. recession since the Great Depression are easing.