Fidelity Bond Mortgage

2007 was a difficult year for Fidelity’s bond funds. Returns were significantly lower then competitor and industry benchmarks. This under-performance was linked to similarly weakness in not-Treasury bonds and the emergence of the subprime mortgage crisis which led to a lot of mortgage backed bonds to underperform.

However Fidelity’s bond funds faired fairly poorly in terms of volume and positioning in the corporate sector, ABS and mortgage backed securities sector including both commercial and subprime residential bonds. Bonds were valued lower then what most investors had picked them up for.

However despite this, Fidelity’s portfolio was not completely lagging as their municipal and government bond funds performed fairly well. In fact all of Fidelity’s municipal bonds managed to beat industry averages (Lipper test).

The capital market was still very chaotic in year 2007 as many investment bond sectors experienced extreme lows when kept next to government treasuries. All bonds across the board had suffered with even the top rated bonds and securities being hit hard on prices.

This unforeseeable turbulence can all be originated back to the subprime mortgage division. Hence the hardest hit securities in Fidelity’s portfolio were its mortgage bonds and other mortgage backed securities.

Mortgage backed securities are bonds that are secured by collective groups of mortgages and whose yield and principal were being paid off through mortgage payments. Fidelity had invested large amounts in subprime mortgages which represent mortgages to those with less then stellar credit ratings or no proper documentation.

Their loans which were bundled together and sold as mortgage bonds are now being hit as these subprime loans are becoming delinquent and resulting in foreclosures. Other factors hitting Fidelity’s mortgage backed securities was the drop in the housing market which further pushed down the value of the bonds. This had shaken new investors and had scared them off the mortgage bond market resulting in difficulties for mortgage lender to get funding through issuing new bonds on their mortgages.

Lending institutions were hit on both sides by delinquent loans and vary investors and are today experiencing stellar drops in their funds. Even prime mortgage fund values have dropped as a result as most investors don’t see the situation getting better until without getting worst first.

This has spread weakness across all sectors consequently hurting the performance of Fidelity’s bond funds. Even though Fidelity’s mortgage bond funds performed the highest in within its segment the fund was still Fidelity’s biggest underperformer and had pulled other related funds down with it.

This trend that subprime mortgage funds are experiencing is expected to continue through 2008 proving a very chaotic time for investors and fund managers in the market. However analysts expect AA and AAA subprime holdings to eventually pickup and honor its bondholders with full payments on principal and interest. Fidelity currently only have AA and AAA rated subprime mortgages under its management. Lower rated mortgage bonds that have subprime securities that are rated A or BBB are expected to experience loss of principal according to Fidelity’s research.

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