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Mortgage-Bond Auction Managed by BlackRock Is Largest on Record

JUL 14, 2014 3:51pm ET
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Mortgage-bond buyers, facing a supply shortage as their market shrinks and trading slows, get a chance tomorrow to bid for securities at the largest auction of its type since at least 2010.

BlackRock Inc. is managing an "all or nothing" sale of $3.7 billion of debt mostly tied to U.S. subprime loans, according to a report by JPMorgan Chase & Co. analysts. Dealers must bid on the entire block of bonds, either to hold on their own books or to fill client orders.

"So much for a quiet July!" JPMorgan analysts led by John Sim in New York wrote in the July 11 report.

The sale would represent about twice the $1.9 billion of U.S. home-mortgage securities without government backing offered in widely marketed auctions last week, according to Wells Fargo & Co. data. It's almost equal to the $3.9 billion that traded, based on a Wells Fargo report last week.

Holders of U.S. mortgage securities bought before the 2008 financial crisis have been unloading large blocks during the past few years to benefit as prices rallied. A European bank may be the seller, Wells Fargo analysts said in the report last week.

Brian Beades, a spokesman for New York-based BlackRock, didn't respond to emails seeking comment on the auction.

Tomorrow's offering is the largest widely marketed auction of nonagency securities being sold in a single block since at least 2010, according to Empirasign Strategies LLC, which tracks securitization-market trading. Including sales where bonds could be bought individually, it would be the 10th largest since then.

The Netherlands sold $11.5 billion of mortgage bonds acquired from ING Groep NV in February, while Lloyds Banking Group sold $8.7 billion of securities in 2013. The Federal Reserve Bank of New York also used large offerings to unload debt it acquired during the credit crisis.

Subprime-mortgage securities returned 7.1% in the first half of 2014, after climbing 15.4% in 2013 and 16% in 2012, according to Bank of America Corp. data.

Many of the individual bonds in the latest offering havenít been previously submitted to insurance regulators for grading, suggesting they'll be new to the market, according to the JPMorgan analysts.

Given insurers canít easily buy them and the July timing of the sale, a dealer may end up holding a fair amount of the bonds, "but this has worked out well in the past," they said.

At the same time, the "real lack of MBS credit supply" amid limited new issuance may fuel demand for the securities, they said. This year, a weekly average of $3.1 billion of nonagency bonds have been offered in auctions, down from $3.5 billion in the second half of 2013, Empirasign data show. The size of the market has shrunk to less than $800 billion from a peak of $2.3 trillion in 2007, Fed data show.

"We think the supply will be welcomed by market participants," Wells Fargo analysts led by Greg Reiter wrote in a July 11 report.

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