Mortgage-backed bonds dodge sub-prime bullet

Investors in recent years have bought billions of dollars worth of bonds that are backed by sub-prime mortgages -- loans to people with shaky credit.

With delinquency rates soaring on those mortgages, prices of many sub-prime-backed bonds tumbled in the first quarter.

But mutual funds that invest in mortgage bonds seem to have largely dodged that bullet.

The intermediate-term government fund category tracked by Morningstar Inc. includes many mortgage-bond-focused funds. That category posted a positive average total return of 1.3% in the first quarter.

The mortgage-fund sector tracked by Lipper Inc. was up 1.4% in the quarter.

Traditionally, mortgage-bond mutual funds have stayed away from higher-risk securities, preferring those guaranteed by the Government National Mortgage Assn. (Ginnie Mae) or issued by Freddie Mac or Fannie Mae, two quasi-governmental mortgage financiers, said Scott Berry, an analyst at Morningstar.

But he conceded that it’s hard to tell from studying fund portfolios just how much of a fund’s assets might be invested in sub-prime bonds. Given the financial alchemy involved in creating mortgage-backed securities, a bond with a high credit rating could, in fact, be backed by sub-prime loans.

Still, if a fund was experiencing a sharp decline in the value of its sub-prime assets, that should be reflected in the fund’s daily share price.

Morningstar and Lipper say they looked for significant swings in mortgage fund share prices in February and March to spot possible sub-prime troubles. “We saw nothing out of line,” said Jeff Tjornehoj, a senior research analyst at Lipper.

tom.petruno@latimes.com