The world’s biggest bond managers are betting housing debt that rallied as much as 41% last year will again beat other fixed-income investments in 2013 as the U.S. real estate recovery strengthens.
TCW Group Inc., Pacific Investment Management Co. and DoubleLine Capital LP are forecasting gains for mortgage bonds without government backing, including those tied to subprime loans, even after hedge funds and other investors piled into the market last year, reducing potential returns.
“Nonagency debt is still the best opportunity in fixed income,” said Stephen Kane, who helps oversee $135 billion at Los Angeles-based TCW. “There is still the potential for significant price appreciation compared with collecting yield on other investments.”
The nonagency market jumped last year as housing started to reverse a six-year slump driven by Federal Reserve efforts to push mortgage rates to record lows. Home values have climbed by more than $1.3 trillion to $23.7 trillion since the end of 2011, according to Zillow Inc., and prices will rise by 3.4% in 2013, JPMorgan Chase & Co. analysts estimate.
“The trade has gotten a little bit crowded,” said Daniel Ivascyn, who runs the $21 billion Pimco Income Fund, which returned 22% in 2012, beating 99% of its peers, according to data compiled by Bloomberg. “You have to be willing to accept price volatility in the near term but over the long run they’re still reasonably attractive.”
Non-agency bonds backed by subprime mortgages issued before the housing market collapsed in 2007 beat most fixed-income assets in 2012, with returns averaging 41%, Barclays PLC index data show. That compares with a gain of about 16% for high-yield, high-risk company debt and a 2.6% return for mortgage bonds guaranteed by government agencies including Fannie Mae and Freddie Mac, Bank of America Merrill Lynch index data show.
The nonagency debt bounced back from 2011, when it lost 5.5%, as Europe’s sovereign debt crisis ignited investor concern that banks would be forced to sell assets and the Federal Reserve Bank of New York botched a plan to auction toxic mortgage bonds it inherited during the bailout of American International Group Inc. in 2008.
The central bank sold the debt last year, fueling confidence that the market for commercial property and mortgage bonds was stabilizing. Goldman Sachs Group Inc., D.E. Shaw & Co. and Angelo Gordon & Co. started pools of capital to invest in housing bonds and hedge funds that invested in mortgages produced the industry’s best returns last year with a gain of about 20%.
