Mortgage- and asset-backed securities, which have gained as much as 60 percent this year, will benefit in 2013 as weak global economic growth and central bank actions keep interest rates low, according to Barclays Plc.
The U.S. economy may be damaged by fiscal consolidation even if a so-called cliff of spending cuts and tax increases is averted, while Europe is in “much worse shape” with high levels of indebtedness, Ajay Rajadhyaksha, the bank’s New York-based head of rates and securitized research, said yesterday in a report. To offset the austerity, monetary policy in developed countries will remain accommodative, he said.
“In this world, we expect strong demand for yield from investors but reluctance to go too far down in quality in credit: in short, a supportive environment for securitized products,” Rajadhyaksha wrote.
Next year’s “search for yield” will extend the trend that stoked gains in 2012, he said. Higher prices mean that the types of U.S. residential- and commercial-mortgage-backed securities with the most credit risk will probably fail to repeat this year’s performance, after some subprime housing debt rose 40 percent to 60 percent and so-called AJ classes of CMBS returned 35 percent, according to the report.
Still, that debt remains attractive as supply declines and it offers better yields after forecasted losses than risky corporate notes, Rajadhyaksha said. U.S. housing is also recovering, with prices likely to climb 4 percent next year, after gains of 5.5 percent in 2012, he said.
Low yields will also make bonds with little or no credit risk attractive even at lower spreads, since an extra 1 percentage point is “far more valuable” when the 10-year Treasury is “at 2 percent than when it is at 4 percent,” he said. The Treasury note yielded 1.65 percent at 12:37 p.m. in New York.
Risks to government-backed mortgage bonds include strength in the U.S. economy that would lead the Federal Reserve to end its purchases of the debt, and a rise in benchmark yields that would also hurt fixed-rate CMBS, he said. Europe’s debt crisis and government interference in the home-loan market could hurt other U.S. residential securities, and most types of securitized debt would suffer in a sharp economic downturn, he said.
“None of these appears to be likely scenarios to us and are definitely not our base case,” he wrote. “Instead, the securitized markets look set to have a good 2013.”