Aug. 17 (Bloomberg) -- U.S. home-loan bonds without government backing were little changed after a six-week rally, as buying by Wall Street traders helped keep prices from falling.

While sales of so-called non-agency mortgage bonds last week swelled to between $1 billion and $2 billion a day as investors who bought at lower prices sought to lock in gains, purchases by securities firms prevented “prices getting smoked,” according to Jesse Litvak, a trader at Jefferies & Co. in New York. Barclays Capital Inc. analysts also cited dealers “providing liquidity to the market” in a report Aug. 14.

“There is really no secret to the fact that the Street has a big bid in here,” Litvak wrote in his weekly commentary to clients. “That is the large reason why pricing has managed to hang in there.”

Typical prices for the most-senior prime-jumbo securities were unchanged last week at 85 cents on the dollar, Barclays data show. Similar bonds backed by Alt-A loans with a few years of fixed rates held at 68 cents. The jumbo bonds are up from about 78 cents in early July, while the Alt-A bonds have climbed from 47 cents. The debt has rallied from 63 cents and 35 cents, respectively, in mid-March.

Alt-A mortgages have atypical terms such as proof-of-income waivers or delayed principal repayment, and are ranked between prime and subprime in terms of projected defaults.

Boost From PPIP

Non-agency home-loan bonds have soared from record lows as investors reduced the yields they targeted amid signs that the deepest housing slump, worst financial crisis and longest U.S. recession since the Great Depression are easing. Last month, a pause in the rally was broken by speculation that Treasury Secretary Timothy Geithner’s Public-Private Investment Program, or PPIP, will add as much as $40 billion of demand.

Securities in the almost $1.8 trillion non-agency market lack guarantees from government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae.

Aside from traders, another type of buyer has been asset- management firms with funds targeting distressed debt, said David Castillo, a senior managing director at San Francisco- based broker Further Lane Securities. They need to put the cash they’ve raised to work to get paid, he said. In June 2007, he predicted “a long and unattractive summer” before markets collapsed.

“I’m reticent to believe we can hang onto these levels for much longer,” he said in a telephone interview today.

Market Challenges Loom

The market may face new challenges after the Treasury and Federal Reserve said in a statement today that “they do not anticipate any further additions to the types of collateral that are eligible for” the central bank’s Term Asset-Backed Securities Loan Facility. That suggests investors in home-loan bonds will never be able to tap the program, a reversal from plans announced in March.

Many holders remain reluctant to sell non-agency mortgage securities because they can’t find good options for reinvesting the cash, Litvak wrote in his Aug. 14 note.

The securities “remain cheap on a relative basis to other asset classes,” even with “little visible improvement in the credit performance,” the Barclays analysts led by Ajay Rajadhyaksha in New York said.

Last week, “there were some real money investors who sold into the sharp run-up in prices and took some profits, though real money still remained the largest buyer of non-agency paper,” they wrote. “Prices mostly remained firm as dealers also provided liquidity to the market.”

Real Money

So-called real-money investors are buyers such as mutual funds, banks and insurers that may trade less frequently than hedge funds and typically don’t use borrowed money when investing.

The U.S. government announced July 8 that the PPIP would begin with nine managers raising as much as $10 billion, and receiving as much as $30 billion in taxpayer capital and loans to buy mortgage bonds originally rated AAA.

In March, the government laid out a plan under which the Fed’s TALF would expand to home-loan bonds as part of Geithner’s PPIP, billed then as a $1 trillion program, in a bid to boost prices by providing loans to buyers. The goals included addressing the devalued assets at financial companies “compromising their ability to raise capital and their willingness to increase lending,” according to a statement.

TALF, which expanded to commercial-mortgage securities in June, will remain open into next year for eligible assets, the government also announced today.

Jumbo mortgages are larger than Fannie Mae or Freddie Mac can finance, currently $417,000 in most areas to as much as $729,750.

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

Last Updated: August 17, 2009 12:10 EDT