The buzz word last week for mortgage-backed securities was CMO issuance, as several billion dollars worth of collateralized mortgage obligation bid lists saturated both the primary and secondary markets.
"Most of the activity in fixed-rate CMOs has been driven by several large bid lists - bank portfolios selling various bonds across the curve," said Tim Romanow, first vice president of CMO trading at Morgan Keegan. "Spreads have held up pretty well, and most of the paper was absorbed. Some went to the Street, some went to orders."
The week's total in CMO issuance was approximately $4 billion, mostly from banks adjusting their portfolios before quarter-end. At press time last Thursday, a $1 billion whole-loan bid list appeared to be the final one seen for the week.
"All this short bank paper is coming out of the woodwork," said Michael Hoeh, an MBS money manager at Dreyfus Corp. "The only people who own this much or this type of paper are some very large banking institutions."
Indeed, many market players attributed the large amount of short whole-loan paper to mergers or corporate restructurings occurring in some banks. Additionally, some changes to banking accounting methodologies are coming up at the beginning of next year, and some sources conjectured that banks are pre-positioning for that.
"Not only is it due to corporate restructuring, but there is the phenomenon of de-leveraging and portfolio restructuring," Romanow added. "There have been lots of leveraged trades over the last few years, so there is some de-leveraging now as well."
Analysts from Morgan Stanley Dean Witter say that more than $16 billion of new agency CMOs are slated for October, along with $6 billion non-agency deals. CMO spreads have held up fairly well given the supply.
Still, Libor is still fairly high - averaging 6.61% by the end of last week on one-month Libor - which is still high above the entire Treasury curve.
"And this is not something that will change until the Fed gives at least a neutral or easing bias, which may happen at the Oct. 3 meeting or in November," an MBS source noted.
By the close of last week, mortgages saw decent two-way flows, with originators selling 7.5s and 8s. However, investors were waiting to scoop them up, along with discounts.
Steady flows are expected to continue, as index players step up month-end extensions, Near close last Thursday, mortgages were outperforming by two ticks. In both sectors, discounts slightly outperformed premiums as banks are better buyers in the lower coupons.
"There is going to be more supply going forward," Romanow said. "This is not the end of it. There will be more selling going forward from here. That might put some pressure on new deals if the Street is long a lot of secondary pieces."
The Regulatory Horizon
In regulatory news last week, Senate Majoirty Leader Lott's plan for getting bankruptcy reform passed apparently has fizzled.
His plan was to attach it to a mandatory spending bill. However, House Republican members of the appropriations committee opposed the idea. A committee spokesman said the committee would "strongly resist any extraneous provisions that would cause a spending bill to be vetoed." The White House has indicated it would veto the new bankruptcy package put together by Sen. Lott.
Also of interest, Federal Bank Regulators published for comment last week in the Federal Register its proposal to require banks to hold $1 of capital for each $1 of residual interest in pools of high-risk securitized loans.
In addition, banks would not be allowed to use residual interests to satisfy more than 25% of their regulatory capital requirements. The comment period extends through December 26.
Also, the Financial Accounting Standards Board is set to issue a new accounting standard 140, which will require new disclosures on residual interests. This includes the assumptions like prepayments, discount rates, etc., used in valuing residuals.
The new standard will also require the reporting of delinquency rates and credit losses on the total pool of securitized assets. FAS 140 would replace FAS 125.
