High yield in US mortgages

THE Swiss private bank, Bank Julius Baer, is recommending that its clients consider the US 30-year Mortgaged Back Obligations (MBOs) as a long-term investment.

The money, managed by Sagam Management Corp of New York, is invested in fixed-interest rate mortgages on US residential property.

The US Government encourages its citizens to buy a home and, provided certain criteria are met, the government and its agencies, such as the Federal National Mortgage Association, will guarantee both the principal and interest on the mortgages.

The mortgages are then pooled and sold to investors. The monthly repayments are structured as a fully amortised loan, and each payment includes a declining portion of interest and a rising portion of principal.

These payments provide a monthly cash flow to the investors.

It was this monthly cash flow which, in 1984, attracted Sagam Management to move into MBOs because the company saw them as a way of meeting clients' expectations of minimising risks and improving returns.

Although the mortgages are for 30 years, the average life is only 8.5 years. The market pays a higher yield for the MBOs than for long-term treasury bonds, and they are actively traded.