Risk and return with mortgage-backed securities.
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Risk and return with mortgage-backed securities.

RISK AND RETURN WITH MORTGAGE-BACKED SECURITIES

1986 will be a record year for mortgage-backed security (MBS) issuance and private debt issues backed by MBS, according to current wisdom. Last year, $110 billion in MBS were issued, making the market roughly equal in size to the corporate new issue market ($112 billion last year) and second only to the US Treasury itself ($171 billion last year). This year, the volume of MBS issues is expected to more than double, possibly reaching $250 billion.

The rally in the bond market will set off a wave of mortgage refinancings, and new security issuance from this source alone is estimated at about $100 billion, or 25% of the approximately $400 billion of MBS in existence. The continued securitization and sale of now-above-water mortgage portfolios of thrifts and other financial institutions, coupled with a domestic housing boom and proposed accounting rule changes requiring amortization of origination fees, will add to this unprecedented flood of new MBS.

The European market, as a source of funds, has become increasingly important. This year, three factors will push it firmly into the mortgage area. First, the US withholding tax exemption for mortgage securities will apply to a far greater percentage of MBS outstanding.

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