Home-equity-backed bonds rated AAA and sold by such leading companies as GE Capital Services , Chase Manhattan Bank, and Saxon Mortgage Inc. are expected to outperform other asset-backeds this year.
Top-rated bonds backed by five- and seven-year home equity loans yield about 130 and 150 basis points more than Treasuries, respectively, according to Credit Suisse First Boston.
Such spreads are wide enough to attract investors and cause the yield gap to shrink, as it did in late 1999, said Lisa Brown Premo, who manages $16 billion of fixed-income assets at First Capital Group in Charlotte, N.C. She plans to stay heavily invested in asset-backeds.
Home equity bonds "were one of the best places to be" in 1999, Ms. Premo said. Their return from interest and price changes was 6.58%, making them the best-performing part of the Lehman aggregate index and outstripping the 2.23% decline for U.S. government securities. The yield gap between home equity bonds and Treasuries narrowed about 30 basis points the past three months, with "another 25 to 30 basis points to go," Ms. Premo said.
The improvement will come in the first months of this year as investors reach for the higher yield of home-equity-backed bonds and other securities sold at yield over Treasuries, she said.
There are still "a lot of folks who have to put money to work" after holding extra cash for any potential yearend problems, Ms. Premo said.
Home equity bonds yield about 40 basis points more than similar mortgage-backed securities, she said, and are often less susceptible to prepayment volatility, because rate declines tend to cause more refinancing of first mortgages than of home equity loans.
- Bloomberg News