MBS: What it means depends on who you are

HSBC’s agreement to pay a $765 million (€661 million) to settle a probe into its sale of mortgage-backed securities (MBS) obviously recalls the financial crisis and the fact that many of these assets became “toxic” in the crisis’s run-up.

On Monday (6th) HSBC said it would pay the sum to the US Department of Justice following a probe into MBS sales. It is the latest bank to settle such claims this year.

But MBS assets are now popular among some investors and have been a part of fixed income portfolios again for some time.

One of those investors is Laird Landmann, who Funds Europe interviewed earlier this year.

Landmann is a senior fixed income manager at TCW and told us that the firm had spent “millions” of dollars on technology to scrutinise non-agency MBS (mortgage bonds without a government guarantee – Landmann’s preferred sector) and was reaping benefits now.

TCW was finding that as more and more bad mortgages fell out of MBS mortgage pools, it meant that non-agency MBS investors were holding debt dating back to the crisis but which were now paid by borrowers who were older, better paid, and – thanks to higher credit ratings and rate modifications – were more likely to pay off their mortgages early, or “pre-pay” them.

Non-agency MBS prices – once down in the 30s and 40s – were climbing towards par value with the momentum of pre-payments behind them, Landmann told Funds Europe.

“We are buying discount bonds trading at 85 to 90 and which have underlying mortgages whose rates were brought down in the crisis to help homeowners. Now that rates have been brought back up again, homeowners are going to pre-pay. If they do, then each pre-payment on a bond bought at 85 nets us 15 points for our clients.”

It’s a “very nice place to be”, Landmann said.

And when Landmann is more concerned about the risks in relatively more vanilla corporate bonds, it shows how the world has changed, too.

Read the full interview, which was published in our July issue, here.

©2018 funds europe



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