Prime Time? Investors Bet Against AAA

SCOTT PATTERSON In the past month, there has been a big selloff in a corner of the mortgage-bond market that investors once thought impregnable: triple A. Since October, Markit Group's ABX index that tracks triple-A-rated subprime bonds has been almost sliced in half. Triple-A Alt-A mortgage bonds, the netherworld between subprime and prime, also have been hit hard. The most troubling change has been a wave of selling in triple-A prime mortgages. Known as "nonagency" mortgages, these don't conform to Fannie Mae and Freddie Mac standards. Many are backed by jumbo loans, large mortgages that Fannie and Freddie don't deal with. The people who signed the dotted line on these loans generally had solid credit. That isn't how the market is treating them. Leland Abrams, a trader at a Florida broker dealer, says his firm has bought prime triple-A mortgage bonds for about 30 cents on the dollar. Similar bonds traded for about 70 cents a few months ago. "This market is priced for Armaggedon," Mr. Abrams says. Traders say large institutional investors have been big sellers of triple-A mortgage bonds. One reason could be the Standard & Poor's November downgrade of a swath of securities backed by Alt-A mortgages. The fear is prime mortgage bonds will be next. Mr. Abrams thinks bargain-hunters eventually will start buying. But investors have been catching falling knives ever since the credit crunch started in 2007. When the dust settles, there mightn't be many hands left to grab hold of all those bargains.