Investors Find Bargains in Asset-Backed Bonds

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NEW YORK -- Asset-backed bonds, whose yields are at their most attractive levels in two years, are looking like a bargain.

The $460 billion asset-backed market has been hurt as investors tried to digest billions of dollars of new sales, and as an economic slowdown in Asia clobbered bonds all over the world.

Investors who held a typical 10-year asset backed lost about $7,000 per $1 million bond just since October. By January, though, the heavy debt sales will largely be finished and Asia's economies may be on the mend, allowing the market to rise. "We started to buy this week," said Michael Hoeh, who manages $5 billion of the securities at Dreyfus in New York. "December is going to be a good time for adding the securities to portfolios." Hoeh bought bonds with maturities from five to seven years that are backed by home-equity loans. Like most instruments in the asset- backed market, issuers bundle payments on consumer debt like home- equity loans or credit cards and use the cash to support the bonds. Hoeh bought his five-year bonds at a yield of about 85 basis points more than five-year Treasuries. As asset-backed bonds rise, lowering their yields, that difference, or "spread," should easily narrow to 75 basis points by the mid-January, he said. Other investors are looking for bargains too. "At these levels, we took the opportunity to add high-quality asset-backed bonds," said Dan Taylor, who helps manage $4 billion of asset-backed bonds at CoreStates/Meridian Investments in Valley Forge, Pa. Taylor said he bought three-year debt backed by auto loans. "There was a lot of carnage," he said. Asset-backed bonds fell during the past two months as issuers flooded the market with new sales. So far this month, companies issued $10 billion of the bonds. They are preparing about $7 billion more by year-end. If the projection is right, asset-backed sales this quarter will be nearly 50 percent higher than in the last three months of 1996. Issuers such as The Money Store of Union, N.J., are in the business of turning consumer loans into bonds. At the end of the year, they're rushing to remove loans from their books by selling bonds. The supply overwhelms demand. …