FDIC has not yet determined the method of selling the securities obtained
Uncertainty over the US Federal Deposit Insurance Corporation’s (FDIC) plans for disposing of a roughly $91 billion mortgage-backed securities (MBS) portfolio acquired from Silicon Valley Bank (SVB) and Signature Bank is causing investors to hold back from the $11 trillion US MBS market.
According to analysts quoted by The Financial Times, the FDIC holds roughly $69 billion in MBS from SVB and another $22 billion from Signature, totaling $120 billion to liquidate when other bonds are included.
Although investors agree that mortgages appear fundamentally attractive, the uncertainty surrounding the approach and timing of the sales is causing them to wait to increase allocations.
The FDIC has remained tight-lipped about its securities holdings but announced plans to market a $60 billion Signature Bank loan portfolio, mostly composed of commercial real estate debt, on Monday.
The challenge for the FDIC will be to maximize the value of any sale, which comes at a challenging time for the MBS market as prices have been hurt by rising interest rates and volatile moves in US Treasuries.
Prices have already been affected by the anticipation of the FDIC’s sales, and the extra yield demanded to hold securities with 2% to 2.5% coupons has widened by 0.18 to 0.27 percentage points more than the equivalent Treasuries over the past month.
The FDIC is planning to sell a large portfolio of mortgage bonds, but there are several factors to consider. One of the main concerns is supply, as the market is still fragile after a downturn last summer.
The FDIC must balance political considerations with financial ones. If they sell to only a few large bidders, they could be accused of favoring big institutions.
If they drag out the sales over several months, they will incur extra hedging and trading costs.
A gradual pace of sales could also carry risks, as the value of the bonds could fall further during that time.
One suggestion is for the FDIC to sell a portion of the portfolio to gauge market appetite before deciding how to dispose of the rest.
The Fed is keeping a close eye on the process, as the FDIC’s portfolio is similar to the Fed’s holdings and could provide clues for any future sales.
However, it is unlikely that the Fed will consider selling in the near term, and any discussion about future sales is for much farther down the line.
JPMorgan analyst John Sim said: “This exercise will certainly be studied as a microcosm of what impact Fed sales — if they ever were to occur — could have on the MBS market. We don’t think the Fed is contemplating sales in the near term — Powell has made that point repeatedly. That discussion is for much farther down the line."
