U.S. home loan bonds without government-backed guarantees rallied for a second week, after declining as other credit markets gained in February and March.

The most-senior securities backed by option adjustable-rate mortgages rose 1 cent on the dollar to 56 cents last week, compared with a record low of 33 cents in March 2009 and 58 cents in early January, according to Barclays PLC. The "catalyst" was increased demand resulting from changes to a federal loan modification program as investors confront a "scarcity" of potentially higher-yielding home loan securities, with corporate debt at the tightest spreads since 2007, JPMorgan Chase & Co. analysts wrote in a report.

Nonagency bonds are still good bets even after generally rising 50% to 60% from lows last year, and 20% to 30% from December 2008, according to Barclays.

"Continued government actions aimed at smoothing out the pace of distressed supply reduce the likelihood of a very negative outcome on housing, but trades it off for an anemic recovery over the next 3 to 5 years," Barclays Capital analysts led by Sandeep Bordia wrote in an April 9 report. "This we think is a better outcome for losses than a further big downward movement in prices followed by a quicker recovery."

The Treasury Department announced March 26 the changes to the Home Affordable Modification Program. Hamp will now focus on encouraging cuts to loan balances as well as payment reductions.

"The recent price rally in part reflects an expectation that cure rates for loans that receive forgiveness will be higher, relative to rate modifications," the JPMorgan analysts, led by John Sim, wrote Friday.

The $1.5 trillion market should also be aided, Barclays said, by cash in money market funds and at insurers seeking higher-yielding debt; a lack of forced sales; and a slower pace of new delinquencies, with "early signs" of that trend showing up among the worst types of loans.

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