Subprime is no longer a dirty word

REMEMBER when nobody wanted to touch US subprime-mortgage debt? That is just a distant memory as it delivers some of the bond market's best returns. The securities that were created in the years leading up to the financial crisis in 2008, the last time when such notes were issued, have gained almost 12 per cent this year, or six times more than junk-rated corporate debt, according to Barclays plc. After contributing to the collapse of Lehman Brothers Holdings Inc, bonds tied to the riskiest home loans have returned 75 per cent since 2010, topping speculative-grade corporate debt for three straight years.

The rally in the US home loan securities stands in contrast to corporate debt markets, which have buckled as oil prices plunged and the Federal Reserve moves towards raising benchmark interest rates from close to zero. With the economy poised to grow at the fastest rate in a decade and home values rising for a third year, subprime investors are being rewarded as the wave of foreclosures on the worst loans subsides.

"A lot of the uncertainty around the asset class has been taken away," Tom Sontag, a money manager at Neuberger Berman Group LLC, which oversees about US$250 billion, said by telephone from Chicago.