Financial bonanza

Asset managers who bought into the bombed-out mortgage-backed securities (MBS) market after the subprime implosion are hoping that their patience will be rewarded now that the U.S. Treasury’s Troubled Asset Relief Program (TARP) has put a floor under prices.

MBS prices fell rapidly when banks and hedge funds deleveraged, leaving specialist bond managers to sort the wheat from the chaff. Although not all MBS will experience heavy defaults, managers have found new buyers hard to come by while the sector has remained in turmoil. But the passing of the TARP is expected to help stabilize the market.

According to Lipper data, some MBS funds have made a positive return this month, implying that on some assets at least, mortgage payments are holding up. SGAM’s US MBS Fund is up 2.52 percent in the three weeks since the TARP was passed, while Vanguard’s US MBS Institutional Fund saw a modest 0.43 percent return.

But it is the next 12 months that will truly determine whether managers who acquired bargains during the fire-sales will have their courage rewarded.

Global bond managers BlackRock (BLK.N: Quote, Profile, Research, Stock Buzz) and Legg Mason’s (LM.N: Quote, Profile, Research, Stock Buzz) Western Asset Management are among those that looked to add through the period of distressed selling and are hopeful that good quality assets will pay off as the market improves.

BlackRock’s Scott Thiel, head of European fixed income, said he was still seeking bargains in the U.S. commercial MBS market and in the non-agency market where prices have stabilized.

“When you have forced selling, high quality and low quality securities are sold down at the same price because the seller needs the money. We’ve spent a lot of time looking at those credits where we think the markdown is not warranted,” he said one hour loans.

ATTRACTIVE

Some U.S. MBS are thought to offer value for long-term investors, particularly those written pre-2006, which should be of better credit quality than the toxic 2006 to 2007 vintages.

“The commercial MBS market (CMBS) still looks very attractive, particularly if you take historic default levels into account,” Thiel said. The CMBS market is currently trading at about 560 basis points over swaps, depending on the vintage. Adding to portfolios has been difficult, as liquidity is poor, but the U.S. Treasury’s attempts to put a floor in the sector has encouraged asset managers who picked up quality MBS at fire-sale prices.

Mike Zelouf, a senior product specialist at Western Asset Management, said the bulk of Western’s portfolio is in agency mortgages.

Unlike non-agency mortgages, which are issued by private institutions like banks, agency mortgages originate from U.S. government-sponsored mortgage enterprises (GSEs) such as Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).

Since these GSEs were bailed out in September, agency mortgages now have an explicit guarantee from the U.S. government. Yields on all agency MBS have been pushed higher in the wake of the Lehman LEH.N bankruptcy.

All the non-agency mortgage paper has suffered mark-to-market losses since the credit crunch began, but the passing of the TARP and the associated recapitalisation measures are expected to help stabilize the sector.

RECOVERY 

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