Mortgage-Bond Auction Failures Reach Most in 2013 as Prices DropJody Shenn
U.S. home-loan bonds without government backing are failing to trade at investor auctions at the fastest pace this year as prices tumble after a rally.
The share of non-agency bonds reported by dealers as not trading after being included in widely marketed auctions rose to 44 percent in the first half of June, up from 18 percent last month, according to data from New York-based Empirasign Strategies LLC, which tracks the information. A total of $9.5 billion of the debt was offered, about the same pace as in the first four months this year, after $32.3 billion in all of May.
Typical prices for senior securities backed by option adjustable-rate mortgages dropped to 68 cents on the dollar last week from 74 cents a month earlier, as concern that the Federal Reserve will curb its bond buying roils financial markets, Barclays Plc data show. Such declines are slowing trading as potential buyers offer bids that sellers consider too low, and Wall Street banks fail to take up the slack.
“The Street is long from a lot of customer sales in the last six weeks, and the move down in price has had an impact on their ability to provide liquidity,” Scott Buchta, head of fixed-income strategy at New York-based brokerage Brean Capital LLC, said today in a telephone interview. Potential buyers are being “much more opportunistic,” while some sellers are trying to “execute at yesterday’s levels.” Others are seeking bids simply to gauge current prices, he said.
Values in the $900 billion non-agency market are slumping after soaring through early May as the Fed’s stimulus efforts drove investors to seek potentially higher returns and housing rebounded with the fastest gains in prices since 2006, according to S&P/Case-Shiller index data on values in 20 cities.
The option ARM securities, which fell as low as 33 cents on the dollar in 2009, rose from 65 cents at the start of the year. The underlying loans can allow borrowers to pay less than the interest due by increasing how much they owe.
Investor auctions of non-agency bonds known as bids wanted in competition are slowing again. Volumes earlier this year were depressed by holders seeking to benefit from later gains. Trading was boosted last month by an $8.7 billion sale from Lloyds Banking Group Plc.
“The non-agency market continues to be impacted by wide bid/ask spreads, which stifled trading activity,” Bank of America Corp. analysts Chris Flanagan, Ryan Asato and Justin Borst wrote in a June 14 report.
Non-agency securities lack guarantees from government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae. Bonds backed by the riskiest subprime mortgages issued to borrowers with poor credit before housing collapsed have fallen 3.7 percent this month, trimming their gains this year to 7.6 percent, Barclays index data show.
“Given the increased volatility in the markets and concerns over Fed policy, further price declines in non-agencies cannot be ruled out,” Barclays analysts including Jasraj Vaidya and Sandeep Bordia wrote in a June 14 report. “Despite that near-term possibility, we remain constructive on non-agencies over the medium term” because of the higher yields the debt offers relative to other risky assets and housing’s improvement.