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Bid list indicates first signs of GSE risk reduction

The Federal Housing Finance Agency plans to sell 5% of the illiquid portion of its retained portfolio assets by the end of the year, meaning the collateral Freddie Mac and Fannie Mae had before the conservatorship.

Since then, the nonagency residential mortgage-backed securities marketplace has been trying to determine the impact from the possible introduction of steady program sellers in a segment that has generally been starved — until just recently — since the onset of the financial crisis. 

Recently, investors have been focused on a relatively large $1 billion bid list announced this week. While there has been no official confirmation, it appears probable that this represents the first structure of the enterprise-risk reduction mandated by FHFA, according to Interactive Data, a leading global provider of financial market data.

“Most of the securities in question were block-sized and many comprised the entire tranche, something the GSE’s typically purchased when they were growing their respective balance sheets,” analysts at Interactive Data explained.

They added, “Bidding instructions were quite explicit, with strict guidelines regarding timing, however investors were permitted to submit levels in several ways, including line by line or all or none.”

The collateral in the bid list consisted of mainly subprime and adjustable-rate prime, or Alt-A loans, the report noted.

As investors might expect for older vintage collateral, historical performance of the bonds out for bid has been relatively strong.

“Given the early and widespread circulation of this bid list, multiple broker deals analyzed and put forth guidance on where they believed bonds should trade,” Interactive Data analysts noted.

They added, “While color was very transparent heading into the cutoff time for bidding yesterday, subsequent information has been sporadic. Initial indications from the Street were that one dealer purchased nearly three-quarters of the list and that execution was though to be strong.”

Overall, the bid list appeared to have modest impact on total nonagency collateralized mortgage obligation (CMO) trading volume relative to recent daily averages.

However, there was a noticeable increase in the amount of Investment Grade (IG) securities that changed hands.

For instance, IG trading volume usually averages $77 million per day, while yesterday’s total was boosted to $623 million, Interactive Data explained.

In terms of flow, it appears that while Thursday’s total trade volume was not extraordinarily high, there was a noticeable increase in dealer position.

“In aggregate, the Street appears to have gotten long approximately $730 million nonagency CMO bonds yesterday. Breaking the activity down by rating, the trend was the same, with customer sells outpacing customer buys for both IG and non-IG,” the report concluded.

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