Investors should bet against some Fannie Mae and Freddie Mac securities because of the prepayment risk for the bonds trading above par, said Jim Shallcross, director of portfolio management at Declaration Management and Research LLC.
The government-sponsored enterprises are set to buy delinquent mortgages out of the securities at a faster pace, paying down the bonds at face value, Shallcross said. "Right now, I think you're playing with fire" in owning the securities, said Shallcross, who made $117 million for investors in two funds closed last month.
Mortgage-bond buyers who pay more than face value may lose money if the securities are repaid faster than expected. Accounting changes (see related story) will help speed buyouts, which can cause prepayments along with refinancing and home sales, Shallcross said.