Subprime Stupidity Redux

[marmar]

(Bloomberg) The rally in U.S. home-loan securities without government backing is accelerating as investors wager the housing bust is over and supply is sopped up by bond dealers emboldened by new capital rules.

Gains on subprime-mortgage bonds from 2005 through 2007, the years that produced the most defaults leading to the worst financial crisis since the Great Depression, have soared to 5.4 percent in July, bringing returns for the year through last week to 21.6 percent, according to Barclays Plc data. Securities backed by option adjustable-rate mortgages jumped over the past month by 7 percent to the highest level since May 2011.

Investors faced with benchmark interest rates at record lows are seeking mortgage securities after a 35 percent decline in home prices from the peak in 2006. Wall Street banks are also adding to inventories after regulatory changes in June. As Citigroup Inc. warns prices may drop if dealers can’t place the holdings, daily trading volumes surged almost 40 percent last week, reaching the highest this year by one measure.

“There’s been a lot of investors waiting on the sidelines until home prices stabilize and now that they have, they’re moving in,” said Adam Yarnold, managing director of securitized products trading in New York at Barclays’s investment-banking arm. In addition, “the absolute low level of rates out there is driving institutional investors like pension funds to put money into anything with” returns that can top 7.5 percent and so- called non-agency securities offer that potential, he said. .................(more)

The complete piece is at: http://www.bloomberg.com/news/2012-07-24/subprime-rally-building-as-dealers-sop-up-supply-credit-markets.html