Mortgage Investors Doubts Appear in Rally of Risky Notes

Investors who piled into bets on some risky types of U.S. mortgage bonds are showing signs of doubt that the notes will extend their rally.

Bondholders last week sought to sell the most government-backed mortgage derivatives known as interest-only securities and inverse IOs through auctions in four months, according to Empirasign Strategies LLC, which tracks securitization trading. Because the bonds have no principal, their returns are especially sensitive to the pace of homeowner refinancings and property sales, which tend to pick up as interest rates fall.