This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Mutual Funds Investing in Unloved Mortgage Bonds Are Soaring

NEW YORK (TheStreet) -- Mutual funds that invest in mortgages have been rallying.

The big winners include Angel Oak Multi-Strategy Income (ANGLX), which has returned 20% this year and ranked as the top performing intermediate-term fund, according to Morningstar.

Mortgage specialist TCW Total Return Bond (TGLMX) returned 11.4%, compared to 4.0% for the Barclays Capital Aggregate benchmark.

These mutual funds have benefited from a broad rally that has lifted mortgages of all credit qualities. Investors have even embraced subprime mortgages, the toxic assets that helped trigger the financial crisis.

As foreclosure rates have fallen lately, prices of some subprime mortgages have climbed to 50 cents on the dollar, up from 40 cents a year ago. High-grade issues jumped recently after the Federal Reserve announced that it would buy $40 billion of mortgages a month as part of the QE3 policy.

Mortgage securities represent pools of loans. Investors in the securities collect the principal and interest that borrowers pay. Part of the appeal of mortgages is their relatively attractive yields.

At a time when 10-year Treasuries yield only 1.62%, mortgages backed by agencies such as Fannie Mae (FNMA) yield about 2.1%. Because of their government support, the agency mortgages come with no default risk.

To get fatter yields, investors can buy securities that are not backed by government agencies. High-quality nonagency mortgages, known as prime, yield about 4.5%. Risky subprime mortgages can yield 8.5%.

Nonagency mortgages were slammed during the financial crisis. With foreclosure rates spiking, some subprime mortgages traded for a few cents on the dollar. Many triple-A-rated securities were downgraded to junk.

After markets hit bottom in 2009, mortgages began recovering. Today investors remain wary, and many prime securities trade at 70 cents on the dollar.

The prices remain undervalued, argues Brad Friedlander, portfolio manager of Angel Oak Multi-Strategy. "This is one of the cheapest sectors of the fixed-income markets," he says.

While Angel Oak has the flexibility to buy many kinds of fixed-income securities, the fund currently has 78% of assets in nonagency mortgages.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,702.44 -177.92 -1.05%
S&P 500 1,943.71 -26.36 -1.34%
NASDAQ 4,391.0280 -71.8740 -1.61%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs