At the beginning of the year, there was a consensus among sell side analysts, mutual fund managers and hedge fund managers that mortgage bonds that were not tied to Fannie Mae and Freddie Mac (non-agency) were the most attractive fixed income investment for 2013. Non-agency bonds backed by subprime mortgages of the pre-2007 vintage jumped 41% last year. High yield bonds gained 16% and agency debt gained 2.6% for the same period. These returns were sourced from bond indices run by Barclays and Bank of America Merrill Lynch.
Major hedge funds investing or invested in these securities are Goldman Sachs Group, D.E. Shaw, Angelo Gordon, Hayman Capital and Elliott Management. Elliott Management only sold their bonds because their yields had fallen too low. The giants of fixed income mutual funds: PIMCO, TCW and DoubleLine believe prices will continue to run up even though more and more investors are buying the asset class. Projected returns for non-agency mortgage bonds are 8%. Compare that to high yield projections (7%) and investment grade projections (3%).
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