AOFM avoids RMBS

While the debate over RMBS funding options goes on there are some points worth noting:

• The Australian Office of Financial Management does not consider it necessary to provide any support to the sector. When it released its revised investment policy a couple of weeks back, to absorb the proceeds from the increased government bond issuance announced by the Treasurer in May, no provision was made for investment in prime 'AAA' rated RMBS. (However, short-term investment in 'A-1+' rated ABCP is permissible and the conduits that issue such paper hold RMBS.)

• A study undertaken for the UK Chancellor of the Exchequer released last week has concluded that the UK Treasury should not create a government-backed agency like Fannie Mae to bolster mortgage funding. It will take too long to establish such an agency and it would be an example of tackling this century's problems with last century's solution. Moreover, the report also concluded that doing nothing is an option as some measures would do more harm than good.

• In the US, where Fannie Mae and Freddie Mac are the subjects of a government bail-out, attention has now moved to spurring the development of a US covered bond market as a new source of mortgage financing. The Treasury Secretary released guidelines for issuers of covered bonds last week. The Treasury Secretary has four banks ready to issue covered bonds and hopes that this will encourage smaller mortgage lenders to do the same.