It's no-brainer following the Fed. As Ben Bernanke promises to buy $40 billion mortgages every month, QE3 and perhaps QE4 is bound to push prices of mortgages higher as it pushed interest rates lower. Use Uncle Sam as your investment adviser. After all the Uncle happens to be the biggest buyer in fixed income markets as long as Quantitative Easing is our monetary/fiscal policy. That simple Follow-The-Fed investment lesson paid off with extraordinary gains last year for the hedge funds specializing in fixed income securities. For this lot of $60 billion in hedge funds, the huge marketplace for mortgage backed bonds paid off in annual returns of 30%-40%, using leverage that was not at great risk-- since the whole world knew the Fed was THE BUYER OF FIRST RESORT, and needed to stimulate the housing market with its financial activities. Certainly the mortgage hedge funds turned in far more spectacular returns than any of the huge macro hedge funds. The advantage for the hedge funds in the mortgage market lay in the inefficiency of that market and the lack of such fierce competition as existed in the much larger universe of macro hedge funds. And buying $40 billion mortgages a month takes out of circulation 6% of the mortgagees outstanding on an annual basis. Now, while the public would be ill-advised to leverage its positions, there may have been ETFs or mutual funds loaded with mortgages that turned in positive returns. I only wish I had spotted this opportunity earlier to give all my readers a heads up. It was a simple concept, and I will hold it dear forever. If you know what the Fed is buying why not ride its tailcoat. I call it Surfing With the Fed.
It's no-brainer following the Fed. As Ben Bernanke promises to buy $40 billion mortgages every month, QE3 and perhaps QE4 is bound to push prices of mortgages higher as it pushed interest rates lower. Use Uncle Sam as your investment adviser. After all the Uncle happens to be the biggest buyer in fixed income markets as long as Quantitative Easing is our monetary/fiscal policy. That simple Follow-The-Fed investment lesson paid off with extraordinary gains last year for the hedge funds specializing in fixed income securities. For this lot of $60 billion in hedge funds, the huge marketplace for mortgage backed bonds paid off in annual returns of 30%-40%, using leverage that was not at great risk-- since the whole world knew the Fed was THE BUYER OF FIRST RESORT, and needed to stimulate the housing market with its financial activities. Certainly the mortgage hedge funds turned in far more spectacular returns than any of the huge macro hedge funds. The advantage for the hedge funds in the mortgage market lay in the inefficiency of that market and the lack of such fierce competition as existed in the much larger universe of macro hedge funds. And buying $40 billion mortgages a month takes out of circulation 6% of the mortgagees outstanding on an annual basis. Now, while the public would be ill-advised to leverage its positions, there may have been ETFs or mutual funds loaded with mortgages that turned in positive returns. I only wish I had spotted this opportunity earlier to give all my readers a heads up. It was a simple concept, and I will hold it dear forever. If you know what the Fed is buying why not ride its tailcoat. I call it Surfing With the Fed.