IFR-Only half of latest Maiden Lane bid list trades

by Adam Tempkin

NEW YORK, June 9 (IFR) - The New York Fed today traded only 36 out of 73 bonds on its latest Maiden Lane II bid list of former AIG (AIG.N) assets, or about $1.89 billion out of $3.8 billion up for auction.

This was the ninth and largest offering of legacy mortgage bonds so far since the Fed started auctioning segments of the portfolio to the open market in early April.

Although all 29 bonds comprising the last offering, for $878 million, were successfully traded on May 19, those in the secondary market complained of Maiden Lane fatigue, noting the negative impact the issuance volume has had on legacy RMBS prices in the secondary market.

For example, only 34 out of 53 bonds were successfully traded off a May 12 bid list, or approximately $1.37 billion out of a total $2.1 billion offered -- a much lower hit ratio than the previous bid-wanted lists.

On a conference call with dealers on May 23, the New York Fed said that it would slow the sales of the Maiden Lane mortgage-backed assets. After this week's list, the next auction is expected in early July.

The New York Fed is auctioning off the US$30bn+ Maiden Lane II portfolio in blocks to the market after turning down an outright bid of US$15.7bn from AIG, which originally owned the securities. The Fed bought the securities at the height of the financial crisis to rescue the troubled insurer.

A sharp increase in legacy mortgage-bond supply in the secondary market since mid-February has driven price benchmarks for legacy subprime RMBS to drop by as much as 21%, according to Deutsche Bank.

The Fed's Maiden Lane II auctions, as well as sales announced by Dexia, a Belgian and French bank, have added to the supply, which "will probably cap non-agency MBS performance through the balance of this year and could send it lower," wrote MBS researcher Steven Abrahams in a client note earlier this week.

By the end of May, the Fed had sold $9.5 billion from its Maiden Lane II portfolio, and Dexia announced plans to sell $6.4 billion of subprime and $2.2 billion of Alt-A RMBS in the near future.

According to Abrahams, the past and pending sales of these subprime and Alt-A credits have put steady pressure on a market that generally traded between $1 billion and $2 billion a week before the Fed sales. The Fed activity roughly doubled that volume, and much of the product is still reportedly sitting on broker/dealer balance sheets.

The market's ability to absorb the Fed sales has eroded since the beginning of the Maiden Lane II auction program, with the Fed in its last auction setting reserve prices on each security and failing to meet roughly half of them.

The Fed recently decided to go to a monthly auction, presumably to give the market more time between auctions to absorb the supply.

"If the market needs to rely on hedge funds to clear the pending supply, then prices have further to fall," Deutsche Banks' Abrahams wrote. "Consistent yields approaching 10% using conservative loss assumptions would likely bring in the first wave of buyers."

(Adam Tempkin is a senior IFR analyst; Tel: 1-646-223-8841)