Aug. 25 (Bloomberg) -- Australia's mortgage-backed bonds are one of the most attractive buys ``on the planet,'' according to Rob Mead, head of Asia-Pacific credit at Pacific Investment Management Co. in Sydney.

Mead, who manages the equivalent of $17 billion, said he is buying top AAA rated U.S. dollar- and euro-denominated bonds backed by Australian home loans. The debt is being sold at fire- sale prices by holders forced to close their businesses amid the collapse of the U.S. subprime mortgage market, he said.

The global investor exodus from mortgage debt markets has boosted yield margins on Australia's home loan bonds about 10-fold in the last 12 months to at least 2 percentage points more than Australia's benchmark swap rate. Even so, the credit quality of the debt, supported by home loans to people with good repayment histories, hasn't declined, said Mead, who runs the Australian portfolio at Pimco, the manager of the world's biggest bond fund.

``We think this paper in the non-Aussie dollar format is very, very compelling,'' Mead said in a phone interview. ``Combined with the absolute level of Australian swap rates, investors are able to generate attractive real yields from very high quality assets over the next three to five years which are not available to almost any other investor base on the planet.''

The yields have also increased because the bank bill swap rate, which is the benchmark the nation's mortgage bonds are priced against, has risen in line with the central bank's increases to official interest rates.

Rising Lending Rates

The Reserve Bank of Australia increased its benchmark lending rate four times since August to 7.25 percent to cool the fastest inflation in 17 years, even as central banks led by the Federal Reserve and Bank of England cut borrowing costs to ease the fallout of the global credit squeeze.

Australia's 90-day bank bill swap rate, the typical benchmark used to price mortgage-backed bonds, rose to 7.3 percent on Aug. 22 from 6.847 percent a year earlier.

The highest-rated U.S. mortgage bonds backed by American fixed-rate prime mortgages yield above 85 basis points more than the U.S. dollar London interbank offered rate, according to credit traders. A basis point is 0.01 percentage point.

AAA rated securities backed by U.S. subprime or second mortgages yield 7.1 percentage points more than Treasuries with maturities similiar to their average lives, according to Lehman Brothers Holdings Inc. index data. Mead said Australian mortgage bonds are yielding around 9.5 percent.

More than 75 percent of residential mortgage-backed securities sold by Australian companies in 2007 were denominated in other currencies, including the U.S. dollar, euros and pounds, according to Standard & Poor's.

Forced Sellers

That debt is being sold back to Australian investors by overseas-based structured investment vehicles and conduits that have been wound down because the seizure in credit markets has crippled their funding sources.

``In this environment, investors feel much more comfortable investing in their own backyard, where they understand everything,'' Mead said.

``The issues in U.S. dollars or euros are coming back even cheaper than the Aussie dollar equivalent,'' he said. ``There is not a lot of supply and it has been quieter in the past two to three weeks, but this is more reflective of the European summer lull than the fact the paper will never appear again.''

The so-called seasoning, or time elapsed since the loan was originated, of Australian mortgages that back existing bonds show the debt is likely to ``perform well,'' Mead said.

Seasoning also increases subordination in a transaction, which acts as protection against mortgage arrears on top of the cover provided by a lender's mortgage insurance. Subordinated notes absorb losses and must be wiped out before holders of higher rated bonds lose their money.

Mortgage Delinquencies

Payments more than 30 days late on prime loans backing Australia's mortgage bonds increased for a sixth consecutive month in May, gaining 1 basis point to a record high 1.49 percent, S&P said July 23.

Default rates may increase as the biggest drop in Australian home prices in five years, the highest borrowing costs in a decade and slowing economic growth lead the nation toward a ``once-in- 100-year real-estate slump,'' according to Residex Ltd., a Sydney company that tracks property prices.

Australian arrears trail the U.S., where delinquencies for subprime loans in 2006 bonds climbed to 41.7 percent in June from 34.2 percent in February, S&P said Aug. 22. Late payments on so- called prime-jumbo loans increased to 4.5 percent from 2.9 percent and Alt-A delinquencies rose to 21.5 percent from 15.2 percent, S&P said Aug. 21 in statements.

U.S. Loan Defaults

In June, three U.S. homeowners defaulted on insured mortgages for every two who got out of arrears, according to the Mortgage Insurance Companies of America. Prime-jumbo loans are made to the best borrowers seeking loans larger than those which can be financed by government-chartered Fannie Mae and Freddie Mac. Alt-A loans are made to borrowers who want atypical terms such as proof- of-income waivers.

``There is decent bid on the paper from a number of different market participants,'' Mead said. ``It's quite attractive to the Australian banks because they can deliver the paper directly to the Reserve Bank of Australia for repo,'' he said, referring to the process whereby a holder of a mortgage-backed bonds can lend it to Australia's central bank for a certain period in return for cash.

To contact the reporter on this story: Laura Cochrane in Melbourne lcochrane3@bloomberg.net.

Last Updated: August 24, 2008 21:00 EDT