“It’s the second-most compelling opportunity for hedge funds by far,” says Troy Gayeski of SkyBridge Capital. “Investors can make attractive returns without any improvement in the economic landscape.” Point in fact, commercial-mortgage debt is at more than 63 cents on the dollar right now, up from just under 47 in October and subprime residential bonds are poised to continue gaining. Gayeski explains, “While non-agency securities may fall further if Europe’s banks need to sell assets, in a doomsday scenario of home prices declining as much as 30 percent and unemployment reaching 20 percent, the bonds are priced so low an investor could probably avoid losses by holding to maturity.”
“While the housing market continues to face some weakness, the recent correction in MBS prices has been more severe than justified by underlying real estate market fundamentals,” said Paulson in a letter to investors in October. “This creates an opportunity to benefit from very attractive yields on both” residential and commercial mortgage securities.
