Banks Quickly Increasing Investment in Mortgage Bonds – Including Subprime


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While the U.S. housing market is continuing its slow recovery in the wake of the subprime mortgage crisis, one of the nation's largest banks is betting billions of dollars that homeowners will not renege on their payments.

Instead of American homeowners, however, JPMorgan Chase & Co. ( JPM ) has significantly increased its holdings of mortgage securities outside of the U.S. The biggest U.S. bank by assets, JPMorgan has now amassed approximately $72 billion in mortgage securities that do not carry U.S. government guarantees.

JPMorgan, one of the first banks to rid subprime holdings from its books at the onset of the economic crisis, has quickly - and quietly - increased its investment in foreign-based mortgage securities. In 2009, the financial institution held only $19 billion of such securities, a figure that jumped to nearly $53 billion by the end of 2010.

While the sovereign debt crisis that has plagued the euro zone for the past few years continues to erode investor confidence, JPMorgan's bet underscores how the company is taking a calculated risk as it endeavors to bolster earnings amid market volatility. Morningstar Inc. analyst Jim Leonard told Bloomberg the move could pay off for the financial giant.

"The bet is they can get a little more yield in areas where they think that they're safe," Leonard told the news provider. What's more, he downplayed the notion that although mortgage bonds are now notoriously associated with the financial meltdown they are inherently a poor investment, characterizing such an argument as "a little unfair."

JPMorgan's increased investment into foreign mortgage bonds may seem surprising, but other banks are taking even riskier bets in the subprime market. A number of large U.S. banks and hedge funds contend that prices have fallen so precipitously since 2007 that it is unlikely the lackluster domestic housing market will weigh them down.

A resurgent subprime market is alarming some investors and government officials, but prices are edging upward, indicating demand has grown for the financial tool. According to data from Barclays Capital , prices for a specific type of mortgage bond tied to adjustable rate mortgages climbed from 49 cents on the dollar in November to 55 cents in February.

Nevertheless, debt prices have climbed in the past - reaching 65 cents on the dollar in February 2011 - and subsequently dropped following a Federal Reserve Bank of New York Auction, according to BusinessWeek. Analysts contend banks are cautiously moving forward with such purchases, but with the global recession 's specter lingering and the threat of an economic slowdown in Europe weighing heavily on investor sentiment, policymakers are casting a critical eye.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Banking and Loans , Bonds , Business
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