How Real Is the Rally in Real Estate Bonds?

As the U.S. Treasury laid out plans to bolster the housing market last spring, Chimera Investment (CIM) jumped into action. The New York real estate investment trust raised $1.45 billion in two stock sales and used the proceeds to scoop up distressed mortgage-backed securities for as little as 50 cents on the dollar. Chimera figures it can earn double-digit returns on the bonds, even if many of the underlying home loans aren't paid back. "Our latest offering is now fully invested," Chimera CEO Matthew Lambiase said in a conference call this summer. "The early results are promising."

After warily circling the market for months, big investors such as Chimera are bulking up on residential mortgages and the investments filled with them. The additional demand, sparked by a modicum of good news in housing and government purchases of the securities, has helped drive up prices on such bonds by as much as 30% since March. But will the rally last?