Whether they’re buying or selling, federal government entities are keeping bond investors on pins and needles as the summer wanes. First bond investors fretted after talks heated up this summer about the Federal Reserve eventually tapering down its purchase of government bonds - a program referred to as QE3 and widely acknowledged as playing a substantial role in helping re-stimulate commercial mortgage-backed bond issuances this year.
Also causing caution on the part of some investors has been the substantial increase in bond-selling efforts by Fannie Mae and Freddie Mac this summer - a potential worry for CMBS bond pricing.
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Securities Bonds Sell-Off
Following announcements earlier this year from Fannie Mae and Freddie Mac on plans to downsize their retained securities portfolios, the government sponsored enterprises (GSEs) have been selling A1A-rated bonds at a monthly pace of $1.6 billion. Over the past few weeks, the CMBS community has seen an increase in the sale of multifamily-directed bonds by both Fannie and Freddie.
In the first half of 2013, the agencies reduced their CMBS exposure by a combined $7.7 billion. They have also gone to the market 11 times since the close of the second quarter, offering $3.1 billion in CMBS paper, according to Lea Overby, CMBS strategist at Nomura Securities.
"This persistent selling is part of a larger effort to 'burn down' their retained portfolios," (as part of their conservatorship agreement) Overby said.
"In addition to an ongoing target of a 15% reduction in holdings per year, the agencies were tasked with selling 5% of their less liquid non-agency mortgage-related exposure by year-end, equating to a $21 billion reduction target for Fannie Mae and a $16 billion target for Freddie Mac."
The Nomura Securities analyst estimates that the two GSEs are about half way through reaching this goal, indicating that additional A1A sales are likely to continue, as well as potential selling of non-agency RMBS, through the end of year.
Although CMBS spreads have remained stable with $1.6 billion in selling per month, Overby said it is unlikely that the market can absorb significantly more supply from the GSEs without it affecting market prices.
"However, because of the appeal of the asset class, we believe that the GSEs will likely increase their pace of CMBS selling to approximately $2 billion per month, constrained only by market demand," she said.
Although elevated, this level of selling is still insufficient for the GSEs to meet their targets of $18 billion to $22 billion, Overby points out. To meet the targets, the agencies would have to sell $4.6 billion to $5.5 billion monthly, well in excess of current bid list activity.
As of June 30, 2013, Freddie Mac listed $28 billion of investments in CMBS securities available for sale up from $26.5 billion at year-end 2012.
Fannie Mae listed $17.4 billion in retained CMBS securities holdings as of June 30, down from $20.6 billion at year-end 2012.
As Clouds Appear, CMBS Issuance Slows
Meanwhile, CMBS spreads have been exhibiting signs of stabilization after the Federal Reserve said there is no preset timeline for tapering down the purchasing of government bonds. However, the overarching message that the U.S. central bank still expects to start scaling back its massive bond purchase program (depending on economic circumstances) will likely continue to increase the level of caution in the market, according to a new report from Standard & Poor’s.
"We expect that, following the summer slowdown, new issuance will show renewed life in the fall--but at a cautious pace,” S&P noted. “We are forecasting that CMBS private-label new issuance could add another $20 billion in the second half of 2013, with issuance ending 2013 totaling approximately $65 billion.”
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