Two Bloomberg stories today beg to be read together in as perfect a study of the Law of Eternal Return (aka, what goes around, comes around) as you’re likely to get.
In one, Jody Shenn looks at the performance of mortgage backed bonds. Those who’ve been keeping track know that mortgage bonds have been among the most successful recent investments. February’s Bloomberg Markets magazine profiles Deepak Narula, whose mortgage bond investments propelled his Metacapital Management LP to the top of the hedge fund rankings. Now, Shenn reports, the bonds that have been sent skywards by Fed buying of mortgage debt are sliding, as buyers look ahead to the end of Federal Reserve support.
Meanwhile, Sarah Mulholland reports that with investors looking for higher yield than traditional commercial mortgages now offer, property-backed CDOs — pools of sliced and diced mortgage bonds — are suddenly back. Sales of property-backed CDOs should be up to $10 billion in 2013, nothing like past peaks but ten times this year’s level.
In other words, just as mortgage bonds themselves start to slip, complex investments built from such bonds return. The Market Now will skip further comment here. When fish are packed this tight in a barrel, shooting them is a waste of bullets.
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*Update: Clarified the definition of property-backed CDOs.