07/22/2011

Uncertainty Interrupts Mortgage-Bond Trading

Look for mortgage-bond trading to remain stagnant for a few more weeks, as investors take stock of political and financial-market unrest — and consider signs of possible improvements.

For the most part, buyers and sellers of home-loan paper have been hesitant to jump into the secondary market in recent weeks amid uncertainty over the U.S. debt ceiling and continued fiscal strains in Greece and several other European nations. The upshot: Prices for most such securities rose a mere one or two cents on the dollar this week, even though supply was scant.

Traders see that pattern continuing for now. But they’re also pointing to signs that activity will pick up in a few weeks, with prices likely climbing in tandem.

One source of encouragement has been this week’s rise in stock prices. The gains, which saw the S&P 500 index climb from below 1,300 on Monday to almost 1,350 on Thursday, suggest that forward-looking players in the equity market have incorporated a debt-ceiling compromise into their trades. “If the S&P 500 starts looking like it might hit 1,400, non-agency prices are going to go higher,” one bond trader said.

The optimism comes with a downside, however. With the prices of mortgage securities projected to rise, few bondholders are willing to sell at today’s levels — perpetuating the market’s currently stagnant state. While some bid lists have made the rounds, takers have been scarce and many sellers have been more interested in measuring the values of their holdings than finding actual buyers.

Case in point: Maxim Group’s 2006-vintage Maxim High Grade CDO 1 began liquidating on July 19, offering pieces of 98 mortgage-backed bond issues with a face value of $800 million. But only a few of the positions sold.

Meanwhile, day-to-day fluctuations in prices across the mortgage-bond market have held to a narrow range of just a few cents on the dollar. Among the securities that have been trading, paper backed by alternative-A loans have been the most active. In that sector, where issuer quality greatly influences values, most senior issues are changing hands at 55-80 cents on the dollar. For example, a batch of triple-A-rated bonds from IndyMac was making the rounds this week at an asking price of 77 cents on the dollar. Similar product from Countrywide was being pitched at 55 cents.

More broadly, trading of Countrywide paper has caught a chill from a June 29 legal settlement in which Bank of America agreed to pay $8.5 billion to holders of soured mortgage securities issued by the lender, which it took over in 2008. Some Countrywide bondholders are holding back from open-market sales, figuring they’ll get a better return by dealing with BofA.

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