Interactive Data’s Kenneth Lee shares market commentary on the trends impacting evaluated prices for structured products, including RMBS, for the month of May 2011.
The Federal Reserve’s sales of non-agency RMBS acquired in the 2008 AIG bailout have continued to influence the broader structured products markets in June. In the past month, ‘supply fatigue’ has been evident in price action for both fixed and adjustable-rate private-label RMBS in the wake of a series of steadily larger bids-wanted lists from the Fed’s Maiden Lane II (ML II) portfolio acquired from AIG.
On June 9, the New York Fed put approximately $3.8 billion RMBS out for competitive bid. The latest list was comprised mostly of poorly performing Subprime and Alt-A bonds. Only about half of the list was actually sold, with the Fed choosing to retain the remainder, likely awaiting higher bids. Market reaction to the results appeared to be negative overall as subsequent pricing observations seemed to indicate lower levels.
The June ML II bid list sustained weaker execution compared to the lists in prior months, particularly for deeply discounted Subprime bonds. Interactive Data analyzed the list by grouping the bonds into two categories based on evaluated prices. The difference between the average trade cover level and price talk across several dealers amounted to approximately 9 points lower for Subprime bonds with evaluated prices below $50 while being about 2 points lower for those with evaluated prices of $50 or greater. In contrast, the average cover levels in April’s lists were actually similar or even higher compared to the initial price talk (Exhibit 1). What’s more, many bonds in June’s list did not trade. In aggregate, approximately 50% of the list was retained by the Fed, with the ratio being slightly better for Alt-A (43%) and slightly worse for Subprime (61%) (Exhibit 2).
Exhibit 1. Average Price Difference Between Trade Covers vs Price Talk for Subprime RMBS
|
Month |
Bonds with Evaluated Prices of $50 or Greater |
Bonds with Evaluated Prices Below $50 |
|
April |
+3 |
0 |
|
May |
+1 |
-1 |
|
June |
-2 |
-9 |
Source: Interactive Data
Exhibit 2. Half of the June 9th ML II List Did Not Trade
The broader non-agency RMBS markets continued to trend lower in the days following the June 9th ML II list before stabilizing over the next week. Evaluations for bonds backed by 2005-07 vintage dented Alt-A collateral were 0.5 point to 1 point lower and 2 points lower for poorly performing Alt-A hybrids, on average, by the end of that week. Offerings from dealer inventories continued to show a downward trend for several senior Option ARM bonds as much as 2 to 5 points lower compared to the beginning of the month, and at least one such bond, HVMLT 2005-10 2A1A, traded at the lower end of earlier guidance. Seasoned prime hybrid paper continued to hold up relatively better.
Aside from the lingering effects of the ML II supply, other potential concerns for RMBS traders include uncertainty over future supply, the approaching quarter-end, prospects for U.S. home prices, and events in Europe.
Two weeks before releasing the latest bid list, BlackRock, the Fed’s ML II advisor, reportedly signaled to market participants that the frequency of auctions would slow, likely resulting from the market’s negative reaction due to the heavier supply. A single ML II list has come out in June, after almost weekly sales throughout April and May. The next list is expected some time in July.
About the Commentary:
Kenneth Lee is director of Fixed Income Portfolio Analysis for Interactive Data, a leading provider of independent evaluated pricing services, delivering daily evaluations for more than 2.8 million fixed income and international equity issues. An evaluated price represents Interactive Data’s good faith opinion as to what a buyer in the marketplace would pay for a security (typically in an institutional round lot position) in a current sale.
Pricing, evaluations and reference data are provided in the U.S. through Interactive Data Pricing and Reference Data, Inc. and internationally through Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd.
Interactive Data does not manage money or advise clients regarding the purchase or sale of securities. Nothing herein is intended to constitute legal, accounting or investment advice.
