Look for more mortgage-backed securities to find their way into investors' portfolios in 1997.
That's the consensus of traders, researchers, and portfolio managers who gauge what kind of asset-backed securities will be hot this year.
Asset-backed securities - investments that pay a fixed rate of return upon maturity, but whose value can fluctuate until then - include mortgages as well as debt issued by companies, municipalities, government agencies, and the U.S. Treasury.
Last year, mortgage securities proved their mettle - with investors snatching up $350 billion, compared with a sluggish $296 billion in 1995. The performance shows that the mortgage market is "once again back on track and will continue to be as the debacle of 1994 and 1995 fades into memory," said Joseph Hu, managing director overseeing mortgages at Oppenheimer & Co.
Indeed, the 1996 volume is much closer to the market's heyday in the early 1990s, before a run of steep losses from esoteric mortgage investments that made big - and often very wrong - bets on even slight movements in interest rates.
After that rout, the mortgage securities market "went through a recession," Mr. Hu said. "A lot of people were burned and demand dipped."
A chastened Wall Street is now producing a lot more plain-vanilla securities, especially pass-throughs made up of groups of similar loans whose payments are "passed through" to investors. Still, not all sophisticated packaging has ceased. But when investment bankers put together more ambitious so-called multiclass deals, they stopped short of the very complex structuring that confused investors earlier this decade and cost them dearly, Mr. Hu said.
Indeed, "people are starting to look at mortgages in a different light," said Anand Bhattacharia, head of fixed-income research at Prudential Securities, New York.
Investors are more comfortable with the newer multiclass mortgage securities, and that creates demand for mortgage loans that form their underlying collateral, Mr. Bhattacharia said.
Lenders must still contend with outside forces, like competitive pressures, drops in housing demand, and unfavorable demographics, but Wall Street should greet the loans they do make with open arms, he said.
Mortgage securities will also appeal to a broad swathe of investors as a safe harbor from the turbulent Treasury market, traders said. Indeed, the 30-year bellwether Treasury bond, in a steep decline, fell more than one point last Thursday.
"We'll probably see more interest in mortgages from all fronts because it provides a decent level of spread" compared with Treasuries, Mr. Bhattacharia said.
It's definitely time to keep close tabs on mortgage securities, said Tom Downing, a senior vice president who co-manages the fixed-income fund at Keystone Financial, Harrisburg, Pa.
Right now, about 10% of the $1 billion fund is in mortgage securities, Mr. Downing said. Looking ahead, "We'll be keeping our eyes open to examples of pretty good spreads on the mortgage side."