After a flurry of Mega and Giant pools came into the market earlier in the year, issuance has dropped noticeably in the third quarter, mainly caused by diminishing MBS bank holdings.
Credit Suisse First Boston reported that August 30-year Mega pool issuance stayed low at $3 billion, $2 billion of which was composed of FN30 5.This is merely half of July's issuance numbers. Furthermore, according to CSFB, issuance so far in the third quarter has paled in comparison to the $89 billion posted in 1Q05 and $55 billion in 2Q05, which was mostly concentrated in the 5.0% coupon.
August's $10 billion 30-year Giant pool issuance also plummeted by $9 billion versus July. FH30 5 and FH30 5.5 Giant creation was $6 billion and $2 billion, respectively, representing declines of $5 billion for each compared to July. Giant issuance in the third quarter of $29 billion falls markedly short of the $63 billion and $37 billion in the second quarter and the first quarter, respectively, reported CSFB. Analysts also mentioned that August 15-year Mega and Giant creation was $2 billion for each, up from less than a billion and $1 billion in July, respectively. This is much less than the first quarter's $17 billion in combined 15-year Mega and Giant issuance.
According to CSFB, contributing to the sharp drop-off in Mega and Giant pool issuance is a plateau in MBS bank holdings, despite a strong rise in deposits. So far in the third quarter, banks have shed $4.5 billion MBS. The selling is attributed to the erosion in carry, largely driven by 10s/2s swap curve flattening to a low of 17 basis points through August. This dip in bank holdings also coincides with $87.1 billion in deposit growth and a $3.4 billion rise in C&I loan holdings, CSFB reported.
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