Two interesting investing opportunities – Mortgage Backed Securities, Corporate Bond Yields
CNBC Friday October 17, 2008 2:07pm EST:
Bryan Whalen:
$.50/dollar bonds – Mortgage backed securities. His point is that even if half of these motrgages defaulted the net return is still flat, without a loss. This is a spectacular opportunity, because most of the defaults have already occured, and although there still may be a lot to come, I don’t see 50% of them defaulting. Also, and I’m not sure exactly how they are priced, but even if 100% defaulted, these securities are asset backed, so they could take a 50% loss and still be flat. Thats the way I see it. Here’s how that works:
Mortgage on a $500,000 house defaults. The bank sells it for $250,000. There is only a loss of 50%, even though it defaulted. So Bryan’s worst case scenario isn’t even really accurate if the securities are as basic as that.
Sandy Rufenacht:
HIgh Yield Corporate Bonds – These rates are very high and there is an opportunity to get in on the high yield of these bonds.
With either of these I would only recommend putting in a small amount of a portfolio (at most 20% of the previously suggested 35% investment in equities, so overall only 7%) in either of these. I like the mortgage backed class better because the massive discount on them.
I still see many factors pushing the recession lower like the $1 Trillion in unsecured credit card debt, that has no asset backing it like the mortgages do. I wouldn’t put anything on them regardless of the discount.
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