The Federal Reserve Bank of New York and Blackrock Solutions conducted the first BWIC from the Maiden Lane II (MLII) portfolio yesterday. The Fed sold RMBS with a face value of over $1.3 billion on Wednesday.
The New York Fed reportedly put 52 securities with a face value of $1.5 billion up for sale at the start of the week. The New York Fed said 42 of the securities with a face value of $1.33 billion were sold in the auction. One dealer reported that a single buyer bought 1/3rd of the list.
The face value is the most recent balance of principal outstanding on the securities, not the market value, the New York Fed noted. It didn’t disclose what price the securities were sold at.
According to Adam Murphy, president of Empirasign Strategies, 80% of line items and 90% of notional met the seller's reserves and the bonds that did trade, traded at or higher than most of the initial price talk.
"The levels were pretty strong and a lot of the bonds were placed into end accounts hands. So all in all, pretty good showing for round one," said Jesse Litvak, a managing director at Jefferies & Co.
Murphy said it's likely that future auctions will price wider. "The market is noticeably cheaper than it was just one month ago," he said. "In addition, the list did not swamp the street with bonds already freely available — these were low dollar price floaters," he said. "We're seeing a lot of follow on activity with BWIC volume around 100% above average today and we're not done counting yet. "
He added that a good portion of these lists is paper that could have been held up by the first Maiden Lane auction. "In summation, it was a healthy start. Much more behind, and how those trade is a matter for debate — I'd say wider, but not much wider, given the orderly nature of the selling process," Murphy said.
Bank of America Merrill Lynch analysts said that the indicative prices on the securities were anywhere from the high single-digits up to the low 90s with the average price in the mid-to-high 50s.
The list's makeup was likely constructed so the New York Fed and Blackrock can find out market demand across the portfolio's different segments, analysts believe. It was also more heavily weighted toward Alt-A securities making up 46% of the list as opposed to 33% of the portfolio based on the current face value. The subprime securities were underweighted with a 39% share versus a portfolio weighting of 54%.
According to analysts, the list was supposedly quite well bid and had a broad participation across dealers and retail accounts. Prices appear to have been slighty higher than where bonds were trading before the sale, they reported. The list offered buyers and the Street the chance to purchase large block sizes and bid on some CUSIPs that had formerly been tucked away. The strong bid might have also been driven somewhat by dealers that are trying to perform well on the list considering the list'shigh profile, analysts said. It still not certain whether MLII prices can hold up against generic BWICs.
Most of the $1.5 billion list traded, although ten line items that reached $170 million did not trade, analysts reported. Of the bonds that did not trade, the biggest piece, which was a $74.7 option ARM tranche was taken out from the list earlier in the day and before the bid was held. Among those bonds that did not trade, the average indicative price was in the low 40s and four of the ten bonds were monoline wrapped, analysts said.
In the next few days, analysts said that the market might start to see how much of the list went to retail accounts and how many were taken down by dealers as these bonds are reoffered into the market.
No matter what, they said that the sale showed that the market can take down bonds from the portfolio. The sale might set new benchmarks or if other BWICs still trade behind the MLII levels, BofA Merrill analysts said.
"We would expect some sellers to come in to test market levels following MLII," they wrote. "We believe the real challenge will be whether the same heightened level of participation will exist at the fifth, tenth or further iterations and if it supplants volume that would have otherwise come into the market."
Analysts noted that the MLII portfolio's sale is part of the broader effort by the government to unwind programs set up to respond to the economic crisis. Aside from the MLII sale, the Treasury is still selling its agency mortgage holdings, analysts noted.
"These actions are moving assets back to the private sector from the public sector as the markets have recovered and liquidity has come back into the system," BofA Merrill analysts said. "So far, market sales have shown that the capacity is there to absorb the government's exit from its mortgage holdings."