Possible GSE bid list shows continued signs of risk reduction

Over the past few months, bond markets have come under widely publicized duress fueled by the uncertainty of the Federal Reserve’s timing of tapering its asset purchases, with rate-sensitive sectors taking the brunt of it all.

Despite downward pressure, evaluated prices for more credit-sensitive legacy nonagency collateralized mortgage obligation have largely managed to hold onto year-to-date gains, with weaker credit bonds leading the charge, according Interactive Data.

“This relative outperformance may have offered the government-sponsored enterprises a window of opportunity to benefit from still elevated market levels by selectively liquidating their legacy holdings, a strategy outlined in their plan for the divestiture of at least 5% of their illiquid portfolio by year end,” explained analysts for the research firm.

The first round of these liquidations by the enterprises occurred in May, with Freddie Mac selling approximately $1 billion seasoned vintage private-label RMBS and Fannie Mae selling roughly $2 billion multifamily commercial mortgage-backed securities.

Both lists were well received by investors and managed to hit the marketplace just shy of the start of heightened fixed-income volatility, Interactive Data noted.

This week, Fannie Mae announced that it plans to sell roughly $1 billion of private-label RMBS from its holdings.

Coincidently, another large $1.1 billion bid list was announced this week, with the trade date scheduled to occur Thursday.

While Fannie Mae did not make a formal announcement, Interactive Data believes there is a high likelihood that this bid list is from one of the GSEs, given several factors. 

For one, most of the securities are block-sized and many comprise the entire tranche.

Additionally, bidding instructions were similar to the Freddie Mac list, with strict and explicit guidelines, and investors permitted to submit levels in several ways, including line by line or all or none. 

The bid list also has roughly one-third each in subprime, Alt-A and prime adjustable-rate mortgage collateral, with the bond quality appearing to be slightly higher for Freddie Mac’s bid list, with most line items and the majority of the bonds being investment-grade rated.

Given the early and widespread circulation of the bid list, multiple broker dealers analyzed and put forth guidance on where they believed bonds should trade. 

For instance, several line items exhibited larger differences of opinion, in some cases by as much as $10 points.

“However, it should be noted that these were mainly smaller sized pieces, which may be deemed less marketable from an institutional perspective,” Interactive Data concluded.

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