Nov. 9 (Bloomberg) -- U.S. home-loan bonds without government backing slumped after almost three months of gains, as supply overwhelmed demand amid concern that the housing market hasn’t bottomed.

So-called non-agency mortgage securities generally declined last week by 2 cents to 4 cents on the dollar, or almost 7 percent in some cases, as sales “swamped the market,” according to a Barclays Capital Inc. report Nov. 6.

“While some of the supply could be attributed to year-end selling by various accounts, hedge funds and money managers have also been looking to book profits before the expected downturn in housing in the winter months,” Barclays analysts led by Ajay Rajadhyaksha in New York wrote in the report.

A record rally in the $1.7 trillion market has been marked lately by speculation the gains will reverse as they’ve been driven by temporary dynamics such as government programs and not an improving outlook for mortgage defaults and home values. At an industry conference late last month, there was an “undercurrent of concern” prices had risen too high with the extent of losses still uncertain, Standard & Poor’s Chief Credit Officer Mark Adelson wrote in a Nov. 6 report.

Typical prices for the most-senior fixed-rate prime-jumbo mortgage bonds fell 2 cents on the dollar to 83 cents last week, according to Barclays Capital data. That’s up from 80 cents in late August and 63 cents in mid-March when non-agency prices bottomed. Similar bonds backed by Alt-A loans with a few years of fixed rates dropped 4 cents to 56 cents last week, after climbing from 52 cents in late-August and 35 cents in March.

‘Full’

Wall Street brokers have gotten “very full,” after providing “a lot of liquidity” to the market by buying bonds at elevated prices for their inventories, said Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago.

“We need to find the next marginal buyers,” he said in an e-mail today. “Supply and demand dynamics will drive prices for the next two months, then we would expect the markets to begin focusing on fundamentals in early 2010.”

While an S&P/Case-Shiller index for 20 metropolitan areas showed home values rose 4.8 percent in the four months through August, such statistics are being distorted by government efforts to reduce foreclosures, Scott Simon, Pacific Investment Management Co.’s mortgage-bond chief, said in a Nov. 3 interview. Prices will be seen to be falling again as sales of seized homes rise when the programs mature, he said.

Cash Flood

Non-agency securities have jumped after a record collapse that began in 2007 as gains across debt markets pushed investors to accept lower potential yields and traders anticipated demand tied to the U.S. Public-Private Investment Program. Recent gains also reflected the resumption of repurchase-agreement loans used by buyers to amplify returns, according to Barclays, as well as a flood of cash into bond markets amid low short-term rates.

Non-agency home-loan securities lack guarantees from Fannie Mae and Freddie Mac, the government-supported mortgage-finance companies, or federal agency Ginnie Mae. Jumbo mortgages are larger than Fannie Mae and Freddie Mac can finance; Alt-A loans fall between prime and subprime in terms of projected defaults.

Funds raising money to buy mortgage bonds under the PPIP, announced in March, receive matching capital and loans from taxpayers. The Treasury Department has said six of nine PPIP managers have garnered the $500 million minimum to get started. The funds “have not entered the market in a big way as yet and may see an opportunity if prices dip a few more points in the coming weeks,” according to the Barclays analysts.

That, and the revival of repo financing, will help prevent “a significant drop in the medium term,” they said.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: November 9, 2009 13:14 EST