Fed to Sell $7.1 Billion in CDOs Despite Churning Markets
06/05/2012| 05:53pm US/Eastern
--NY Fed resumes CDO sales from Maiden Lane III portfolio
--Sales may signal outperformance of residential-mortgage assets
--Fed is winding down portfolios taken on during AIG bailout
(Adds information, investor comment and analyst comment, in the first, fourth and ninth paragraphs.)
By Al Yoon
The Federal Reserve Bank of New York on Tuesday said it plans to auction $7.1 billion of complex-debt securities next week from a portfolio set up during the 2008 bailout of American International Group Inc. (>> American International Group, Inc.), signaling persistent demand for the risky assets despite turbulent financial markets.
The New York Fed asked several Wall Street dealers to bid on seven collateralized-debt obligations from its Maiden Lane III portfolio on June 13 and June 15, according to a posting on the bank's website. The securities are known as Altius I Funding, Altius II Funding, Davis Square Funding II, Davis Square Funding III, Davis Square Funding IV, Davis Square Funding V and West Coast Funding I.
The Maiden Lane III sales of primarily residential-mortgage bond CDOS come amid signs that the underlying debt has largely held its ground in recent weeks despite wrenching fallout on other risky securities following the flare-up in Europe's debt crisis and signs of a stunted U.S. economic recovery. Prices on many residential-mortgage bonds have been largely unchanged since the first quarter, said Bill Roth, co-chief investment officer at Two Harbors Investment Corp. (TWO), a mortgage real-estate investment trust.
"We've seen very strong support for that market," Roth said at a Keefe, Bruyette & Woods Inc. mortgage-finance conference on Tuesday. Two Harbors, which has $1.9 billion of "non-agency" mortgage bonds in its portfolio, could be interested in Maiden Lane III CDO assets if they fit into REIT mandates, Roth said last month.
The demand has probably weathered more volatile trading elsewhere because parts of the housing market have stabilized, REITs and other investors have raised significant amounts of cash to invest and the Fed has fewer of the assets to sell, he said.
Yields on non-agency mortgage bonds between 6% and 12% are also keeping money managers "engaged" as Treasury 10-year yields broke below 1.5% last week, Bank of America Merrill Lynch analysts said in a research note from Friday. Mortgage bonds have slipped recently, though they are outperforming other assets, analysts said.
Bank of America analysts said they expected "more downside risk" in mortgage bonds if Europe's crisis deepens further, however. The bonds would also lag a rally if there is a resolution to the euro zone's woes, they added.
In February, the New York Fed completed the sale of some $30 billion in face value of residential-mortgage bonds held in its Maiden Lane II portfolio, also tied to AIG's bailout. It has since sold more than $12 billion of CDOs backed by residential- and commercial-mortgage bonds from the Maiden Lane III portfolio as it seeks to wind down the vehicles at prices that represent gains for the public.
Next week's sales signal demand for risk assets, "albeit at lower prices than we saw a month or two ago, and the Fed's desire to wrap up its involvement in the Maiden Lane vehicles," said Scott Buchta, head of mortgage strategy at Sandler O'Neill & Partners LP.
Write to Al Yoon at email@example.com.