Government halts RMBS auction on back of low volumes

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(Bloomberg) -- The Australian government won’t proceed with selling off its mortgage bond portfolio until February at the earliest after it decided not to accept any bids at its most recent auction.

The Australian Office of Financial Management, the government funding agency tasked with selling down the residential mortgage-backed securities it bought amid the global financial crisis to support the market, announced on Thursday the cancellation of auctions it had scheduled for November and December. It also won’t hold a sale in January and is yet to commit to any sales further down the track.

The AOFM has undertaken five RMBS auctions since the government announced in the May budget its plan to gradually offload the remaining securities it acquired under the support program, worth about A$4.6 billion ($3.3 billion) in amortized face value terms at that point. While it had expected to sell off A$300 million to A$500 million of notes a month, it has so far disposed of just A$457.5 million of securities and has never achieved its expected minimum at any sale.

“Given the poor volume results in the auctions to date, with particular regard to the last auction in October where no securities were sold, the announcement today is not surprising,” Westpac Banking Corp. analyst Martin Jacques wrote in a note.

Increased Volatility
The recent government auctions came at a time of increased global volatility, as credit spreads widened amid concern about the potential impact of tighter U.S. monetary policy and a slowdown in China, Australia’s largest trading partner.

The targeted amount of as much as A$500 million per month compares with a market for new bonds that’s seen a total of about A$24 billion in mortgage-backed notes issued so far in Australia this year.

In its first four auctions the AOFM sold A$160.5 million, A$96.19 million, A$122.85 million and A$77.98 million of notes respectively.

Reserve Prices
At its fifth auction on Oct. 22, the AOFM chose not to accept bids for any of the four lines on offer because they failed to meet reserve prices. It did not receive any bids for two of the securities.

AOFM Chief Executive Officer Robert Nicholl said the following day that the agency was “not under any time constraint to divest the portfolio” and noted that market conditions had been “challenging” since June, largely due to global events.

“In the event that the AOFM decides to hold an auction in February, it undertakes to provide no less than two weeks’ notice prior to the auction,” the Canberra-based agency said Thursday.

Westpac’s Jacques, who notes that the current portfolio has now been reduced to A$3.46 billion, said the best and least disruptive path for the government to take now would be to hold on to the portfolio and only sell down in response to inquiries from potential buyers. That was the kind of ad hoc approach it had taken before May’s announcement.

“Regardless of market conditions, the resumption of the auction process in early 2016 in the current format would, in our opinion, yield similar results given the level of engagement in recent auctions,” he said.