In mid-2007, the nonagency mortgage bond market stood at $2.3 trillion, according to Federal Reserve data. Over the past several years, the market for home-loan securities that don't have government backing has contracted to less than $1 trillion. Meanwhile, demand for such bonds has increased as the housing market recovers. "The contraction is a huge part of the story of why non-agencies have outperformed almost every other asset class," said Bryan Whalen, co-head of mortgage bonds at TCW Group.

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