Munder may halt growth of TALF fund as yields drop

NEW YORK (Reuters) - U.S. asset-backed securities have rallied so much on a Federal Reserve lending program that at least one fund created to take advantage of the initiative may soon halt its growth.

Munder Capital Management, which started a fund to capitalize on the Fed's Term Asset-Backed Securities Loan Facility (TALF) in April, may curb its $400 million portfolio since yields on the assets have shrunk dramatically, said Mike Krushena, a senior portfolio manager at the company, which oversees $15.2 billion.

The TALF program aimed at countering effects of the financial crisis on consumer debt has since March spawned more than $50 billion in bonds, which raised money for credit card, auto and small business loans. Demand has cut yields on the bonds to less than 1.5 percentage points over an interest rate benchmark, from 5 percentage points in January, said Scott Buchta, a strategist at Guggenheim Capital Markets in Chicago.

"From the ABS perspective, we are very close to being done, or priced out of that marketplace because (TALF) has been successful," Krushena said in an interview on Thursday from Munder's Birmingham, Michigan, offices.

Krushena said Munder may make some investments in higher-yielding commercial mortgage-backed securities that in July became eligible for the Fed lending program, which offers investors low-cost, non-recourse loans. But that will not amount to a new strategy, he said.

By some measures, the returns available after figuring in the Fed's loans have declined to 6 percent from 18 percent when the program was launched in March, he said.

Money managers are still starting funds to capitalize on government-sponsored liquidity, including TALF funds. But investors may be turning their sights on the $40 billion in potential buying power behind the Public-Private Investment Plan set by the U.S. Treasury to purchase toxic assets weighing down bank balance sheets, Guggenheim's Buchta said.

PPIP managers were named on July 8, and had up to 12 weeks to raise at least $500 million each from private investors.

"Some investors say that should the TALF funds get squeezed tight enough, much of the new money raised will be diverted to the PPIP funds instead," Buchta said.

Funds that started TALF portfolios months ago will earn "a lot of carry" since the investments were made when yields were higher, he said. New TALF funds will have a harder time meeting return targets, he said.

ABS "issuance is flowing again," Munder's Krushena said. "TALF has been wildly successful."

(Additional reporting by Nancy Leinfuss; Editing by Kenneth Barry)