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Federal Home Loan Banks to Sell Mortgage-Tied Notes

The Federal Home Loan Banks, the government-chartered cooperatives owned by U.S. financial companies, are selling $500 million of securities linked to mortgage-bond prepayments, the system’s first offering of such debt in almost two years.

The amortizing prepayment-linked securities, or APLS, carry 2.6 percent coupons and are being sold this month by RBS Securities Inc., according to Bloomberg data. They will mature no later than April 2015, though are similar to collateralized mortgage obligations in that the timing of payments to investors will vary based on loan refinancing, home sales and other sources of prepayments.

The Federal Home Loan Banks last sold APLS in June 2008 to bring total sales to $11.5 billion since 2003, when the securities were first offered, according to a March 30 report by Stamford, Connecticut-based RBS Securities. Issuance halted as bond buyers sought only the most-liquid securities tied to home loans as financial markets seized and property prices tumbled.

The sale “points to the fact that banks and money-managers continue to look for short-duration, high-quality assets with attractive spreads,” Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago, said in an e-mail.

The 12 regional Federal Home Loan Banks lend money at below-market rates to the more than 8,000 thrifts, credit unions, insurers and commercial banks that serve as their owners, mainly to finance those members’ mortgage holdings. They also buy and hold mortgage-related assets themselves. The AAA rating on their debt reflects the likelihood that the U.S. would bail them out if needed, according to Moody’s Investor Service.

Reduced Debt

The FHLBs “generally use APLS to fund mortgages,” Michael Ciota, a spokesman for the system’s Reston, Virginia-based finance office, said today in an e-mail. “We have issued these periodically in the past, but APLS are not likely to become a frequent transaction.”

The system is among the largest U.S. borrowers after the federal government, with $870.9 billion of debt as of March 31, according to its Web site. That’s down from a record $1.33 trillion in October 2008, as an easing in credit markets, slower bank lending and higher deposit balances reduce members’ demand for financing.

The Federal Home Loan Banks raise money as a group in the so-called agency debt market. Government-supported mortgage companies Fannie Mae and Freddie Mac are the other largest sellers of the debt.

The FHLBs don’t guarantee any mortgage-backed securities, unlike Fannie Mae, Freddie Mac and federal agency Ginnie Mae, according to the RBS Securities report.

The maturity of an APLS may appeal to investors looking to stay within investment guidelines or limit “extension risk” that occurs if prepayments slow, according to the report. In an APLS, a portion of the principal is retired each month, based on prepayment of an underlying pool of mortgage bonds.

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