U.K. Mortgage Bonds Trade at Best Levels Since ’08 on Haven Bid

Mortgage bonds in the U.K., Europe’s biggest market, are trading at their best levels in 4 1/2 years as buyers shrug off the impact of a worsening economy and seek top-rated alternatives to benchmark government debt.

Investors demand 95 basis points more than the euro interbank offered rate to hold five-year bonds backed by prime U.K. home loans, according to JPMorgan Chase & Co. That’s the first time the spread has narrowed to less than 100 basis points, or a percentage point, since February 2008.

“We expect the tightening trend to continue as the search for yield goes on,” said Markus Ernst, a strategist at UniCredit SpA in Munich. “U.K. prime RMBS are characterized by a sound fundamental performance despite a challenging economic and housing-market environment in the country.”

Fund managers seeking a haven from the euro-region crisis are stoking demand for bonds pooling British home loans even as the continent’s third-biggest economy wallows in a double-dip recession. U.K. residential mortgage-backed securities offer top ratings and low defaults while at the same time paying investors a return when yields on government bonds from countries such as Germany have turned negative.

Stable Performance

The performance of the mortgages underpinning the U.K. bonds has remained stable amid Europe’s sovereign debt woes, with outstanding repossessions at 0.2 percent and cumulative losses at 0.3 percent as of the end of May, Moody’s Investors Service said in a July 31 report.

That’s despite Britain’s economy shrinking 0.5 percent in the three months through June, the third straight quarter of contraction, according to official figures published Aug. 24. U.K. house prices fell for a second month in August as demand declined amid a “fragile” market, London-based property-research company Hometrack Ltd. said today.

U.K. residential mortgage bonds are the most popular asset-backed securities in Europe, with 20 billion euros ($25 billion) of primary sales this year out of a total market of 43 billion euros, according to JPMorgan data.

Supply has been hurt by banks having less need to sell ABS to raise money because of the flood of liquidity from central banks. Lenders are also using the bonds as collateral for central bank loans instead of offering them to investors, helping to keep prices buoyant.

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