Hedge-fund manager Kyle Bass, who made $500 million shorting subprime mortgages during the 2007 crash, said he’s now betting half his firm’s money on a rebound in those assets.
Securities tied to the riskiest mortgages are virtually “bullet-proof,” because even if the U.S. housing market declines by 10 percent, investors won’t take a principal hit on their bonds, Bass said in an interview with Bloomberg Televison’s Stephanie Ruhle on Market Makers. The assets offer a “very safe place” to make double-digit returns, he said.
“We have more than half our money in subprime bonds,” Bass said. “You don’t like a pair of jeans at 200 bucks, but when they go on sale for $25 you look great in them.”
Bass’s Hayman Capital Management LP is boosting its investments in mortgages as the assets produce the hedge-fund industry’s best returns. Firms focused on the market have gained 19 percent this year, compared with the industry’s average gain of 1.1 percent, according to data compiled by Bloomberg.
Mortgage funds have outperformed as the U.S. housing market rebounds, homeowner refinancing remains constrained and the U.S. Federal Reserve buys government-backed debt to try to stimulate the economy.
Bass said his bullish bets are focused on the top tranches of mortgage securities, which would have to endure a “draconian scenario” of homeowners not meeting their payments before bond investors would be hurt. The assets are the “best investment” at a time when U.S. Treasuries provide no yield, he said.
Bass started raising money for a fund focused on residential-mortgage-backed securities earlier this year, two people familiar with the matter said in February.
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