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New Investment Vehicle Lets Investors Bet On Mortgages With Insane 16x Leverage

UBS announced a new exchange-traded note today that illustrates just how wild the "search for yield" has become.

The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities.

So, in effect, if you're bullish on mortgage-backed securities, you could use this product to lever up 16 times.

However, the real driver behind this new ETN and those like it is the low-interest rate environment that has dominated markets over the past few years. This has launched an epic "search for yield" among fixed-income investors looking to find a place to park their cash and generate a reasonable return.

With yields so low – and, more specifically, the spread between MBS and Treasury yields so low – investors have had to lever up their purchases of MBS in order to capture some more return.

A few tweets from bond trader David Schawel really drive this point home:

Just when I thought the yield chase had hit the peak of stupidity, UBS launches a 2x vehicle on 8x levered mREITs marketwatch.com/story/ubs-laun…

— David Schawel (@DavidSchawel) October 17, 2012

Seriously, levering 1.75% MBS pools 8x isn't enough - the average Joe needs a 2x ETF to give he/she some more juice... brilliant

— David Schawel (@DavidSchawel) October 17, 2012

It's absolutely asinine to launch a product like that at historically high MBS prices and near record tight spreads to T's

— David Schawel (@DavidSchawel) October 17, 2012


And of course, since these exchange-traded products are geared toward retail investors, when interest rates finally do rise, they are the ones who will lose big.

(h/t @DavidSchawel)



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