UPDATE 1-NY Fed sells $626 mln Maiden Lane mortgage bonds

Wed Apr 13, 2011 4:54pm EDT

(Recasts lead, adds byline, comments and background)

By Al Yoon

NEW YORK, April 13 (Reuters) - The Federal Reserve Bank of New York sold 37 of 42 mortgage bonds auctioned on Wednesday, indicating dealers maintained the strong demand seen in an earlier sale from the widely watched Maiden Lane II portfolio.

The sale is the New York Fed's second from the portfolio created during the depths of the financial crisis to absorb the troubled "private-label" residential mortgage-backed securities from AIG (AIG.N), and help prevent the collapse of what was the world's largest insurer.

"When I see only five bonds did not trade, and (bids) being strong relative to initial talk, I'd say it's a successful auction," said Dan Nigro, a bond consultant and former portfolio manager in Montclair, New Jersey.

The bonds sold represent a face amount of $626.1 million, compared with a total $691.3 million in securities offered. Another eight bonds with a face value of $534.1 million will be auctioned on Thursday.

Despite high defaults and foreclosures plaguing the underlying loans, the bonds have been in great demand since early 2009 for their additional yield over other fixed-income asset classes. The auctions are seen as an opportunity for investors to purchase the securities in a market where supply is shrinking. The sales also help price transparency.

"The bidding was strong and widely dispersed," said Steve Kirch, President of Carrington Investment Services in Santa Monica, California. "Given the scarcity of assets, investor interest appears to remain solid for this asset class."

AIG last month offered $15.7 billion for the entire portfolio, but the Fed last week said the public interest in maximizing returns and maintaining market stability would be better served by selling the assets competitively. The face amount before last week's sale topped $30 billion.

The initial auction met with stronger-than-expected demand with 42 of 52 bonds sold, with a traded face amount of $1.3 billion, according to dealers and investors. It was encouraging to investors who have seen prices on subprime and other RMBS soften slightly this year.

The apparent strength in Maiden Lane II bids led other investors to offer bonds for sale in recent days, but many securities didn't trade as bids failed to meet expectations, one trader said.

DoubleLine Capital, led by mortgage veteran Jeffrey Gundlach, submitted low bids last week to protect itself from growing losses on residential mortgage bonds, especially those backed by subprime and option-adjustable rate loans.

The bonds would likely suffer in coming months as foreclosure supply hurts home prices, and as investors see less cash recovered from the assets in liquidation, Gundlach said in a conference call on Tuesday. (Reporting by Al Yoon; Editing by Jan Paschal)

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