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The Handbook of Municipal Bonds by FRANK J. FABOZZI, SYLVAN G. FELDSTEIN

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CHAPTER 53
Single-Family Housing Bonds
Kurt van Kuller, CFA Portfolio Manager 1861 Capital Management
 
 
 
Sophisticated investors have long regarded single-family housing bonds as one of the hidden treasures of the municipal bond market. Their inefficient pricing attracts those with the resources to seek excess returns. Research may consistently uncover undervalued opportunities in this sector. Conversely, many traditional bond buyers do not commit the necessary resources to understand this idiosyncratic sector. They are deterred by the volatility of prepayment calls, the opacity of housing bond structures and cash flows, pronounced negative convexity, and uneven disclosure. In this chapter, we explore the attributes that set them apart from other municipal bonds, and allow the reader to determine if these are suitable for their portfolios.

THE APPEAL OF SINGLE-FAMILY BONDS

The investor base for single-family (SF) bonds has waxed and waned over the years, as the sector has cycled in and out of favor. Since 2005, there has been a major influx of new institutional buyers into the sector. There are five reasons for this.
First, SF bonds offer a yield premium over other high-grade municipal bonds of up to 75 (tax-exempt) basis points currently. This is not attributable to credit risk, but call risk. It is analogous to the higher yields that Ginnie Mae passthroughs (GNMAs) carry versus Treasury bonds. The yield premium also compensates for negative convexity and, in most cases, the ...

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