Mortgage Backed Bonds

[lmrhoades]

Henry...
Mortgage Backed bonds such as pimco's PTRIX seems risky based on the mortgage mess. Am i wrong?
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LMR

[HenryTo]

Hi Len,

No, they are buying agency MBS right now at historically spreads. These are implicitly guaranteed by the U.S. government - but given this environment, there is no way they will walk away from these securities - how could you justify bailing out Bear Stearns and LTCM but now the obligations of U.S. homeowners? Moreover, the underwriting standards at Fannie and Freddie have remained solid over the last few years. They lost an enormous amount of market share precisely because they did not lower their underwriting standards.

Obviously, we would see rising delinquencies in the prime sector as well since housing prices are declining, but over the long-run, these investments are solid. In the meantime, everyone agree that the entire agency MBS sector is cheap - but no major player has capital to buy and the retail investor and sovereign wealth funds are still standing on the sidelines.

Best regards,

Henry