Friday, April 01, 2011

The Return of Subprime Bonds
Here is a Wall Street Journal article on how pricing on subprime bonds has rebounded and how subprime bonds are attracting investors, including conservative insurance companies.  The focus of the article is on existing subprime bonds, which as an investment class, saw prices drop to near $.30 on the dollar at the worst of the credit crisis.  Subprime bonds are now trading near $.60 on the dollar.  The article's point is that subprime bonds' recent strength signifies a healing of the credit markets, as investors are willing to take on more risk.

The return of subprime bonds, according to the article, is also signaling that the housing market has bottomed and has more upside than downside.  The article focused on subprime bonds issued before the credit crisis.  It did not mention any new issues.  I'd be curious to know if there is any demand for new issue subprime bonds, or if there are even any new subprime mortgages that could be included in a new subprime bond issue.

One encouraging sign is the govenment's refusal to take the short end of an offer by bailed-out insurer AIG:

The market burst into the spotlight in March when an unlikely buyer stepped in: AIG, the giant insurer that had to be bailed out by the government because of its own bad bets on subprime mortgage bonds.
AIG offered to buy back a pool of bonds that the Federal Reserve had taken off its hands during the crisis. AIG's $15.7 billion offer for the bonds, which have a face value of $30 billion, spurred other investors to consider making offers.
Citing "improved conditions" in the market and "a high level of interest by investors," the Fed on Wednesday rejected AIG's offer and said it would begin selling off these mortgage holdings, letting investors bid for pools of bonds and individual securities so the central bank can maximize its profits.
At least four large life insurers, among the most conservative of all investors, are eyeing the subprime bonds the Fed plans to sell, according to people familiar with the matter.

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