Maiden Lane’s no lady. She continues to harass Wall Street.
The Federal Reserve has been selling off the portfolio of dodgy Mortgage-Backed Securities (MBS) it acquired as part of its bail-out of AIG. Bloomberg reports that falls in the credit default swap (CDS) indices used to protect against losses certain types of debt has been accelerating this month.
Action which you can see in the below Markit chart — from the infamous ABX series:
In ultra-basic terms it looks like the flood of supply coming from the Federal Reserve may have knocked the credit market on its head, despite continued tweaks by the central bank to its auction process. The supply is feeding into lower prices for MBS and high-yield bonds, leading some dealers to hedge their exposure via CDS — pushing up CDS prices and lowering those synthetic indices.
Here’s some independent commentary from Brian Willinsky at Interactive Data:
The Federal Reserve’s further sales of non-agency RMBS acquired in the 2008 AIG bailout continued to influence the broader structured products markets during May. The increased supply appeared to exert downward pressure on prices. Bids-wanted lists from the Fed’s Maiden Lane II (ML II) portfolio in May comprised 204 bonds totaling $5.4 billion in current face balance – considerably greater than April’s MLII offers of 112 bonds totaling $4.1 billion.
The MLII lists represented approximately 40% of May bid-wanted activity for both non-agency adjustable-rate CMOs and subprime RMBS. In the face of this supply, execution levels for adjustable-rate bonds appeared to weaken as the month progressed. Prices were generally weaker by approximately 1/2 point across various categories of adjustable-rate products, based on Interactive Data’s observations of bids, offers and actual trades.
Meanwhile, recent vintage subprime paper weakened by approximately 2 to 3 points from late April through late May. Reinforcing the possibility that the ML II lists were making a negative impact on market pricing was the observation that seasoned bonds, which appeared to trade at firm levels at the beginning of the month, traded in the second half of May at lower levels.
AIG’s offer to take the entire portfolio for $15.7bn must be looking pretty good right now.
Related links:
New strategy – AIG will buy European junk instead of its own – FT Alphaville
Is credit on the verge of an oversaturation “perfect storm” implosion – Zero Hedge
Maiden Lane puts pressure on MBS market - HousingWire