Forty-year bonds are coming to the bond market--and this time it has nothing to do with European sovereigns creating new benchmarks. Analysts at Lehman Brothers say 40-year sub-prime loans are being increasingly originated by mortgage lenders and bond investors should familiarize themselves with the mechanics of the new collateral that will end up in asset-backed collateral pools. Earlier this year, France made headlines when it extended the government curve beyond the traditional 30-year limit by selling a 50-year offering in February.
As for the 40-year variety, Lehman analysts say such collateral has yet to show up in the market but they expect it will soon, based on rising origination levels. As a result, they recommend investors familiarize themselves with the collateral differences between 40-year loans and interest-only borrowings now. One inherent risk in bonds that would be backed by 40-year loans is that, compared to 30-year loans, the longer versions have higher potential loss severities because they amortize at a slower pace, according to analysts Akhil Mago and Sihan Shu.