AOFM's scales back RMBS sale program after another poor auction result

The Australian Office of Financial Management has completed its third auction of residential mortgage-backed securities, accepting bids for A$122 million of the $500 million of securities on offer.

It was another disappointment for the AOFM, which has sold $378 million of its RMBS holdings after putting $1.5 billion worth of securities up for sale in three auctions since June.

In the latest sale the AOFM accepted bids on only three of the eight note series on offer - Barton 2011-1, Illawarra 2010-1 and SMHL 2008-2.

From the outset it seemed that either the AOFM's (and the Government's) price expectations were too high or bidders wanted too much of a bargain. Not much appears to have changed over the three months since the program began.

Following this latest auction, the AOFM said that until further notice it would offer between $350 million and $400 million for sale at each auction.

The sales follow the Government's announcement in the May Budget that the AOFM would divest its RMBS holdings, valued at $4.6 billion at the time.

Earlier this month, AOFM chief executive Rob Nicholl said he would not conduct a fire sale to meet the Government's deadline for divestment.

Nicholl said his organisation did not feel pressured to respond in future auctions by selling large volumes at low prices to catch up with its divestment schedule.
 
"Given the lack of trading data for the secondary RMBS market we fully expected that it would take some time for expectations to adjust, although we had probably underestimated the extent of the gap in expectations revealed so far," he said.

"The Treasurer is more concerned about negatively impacting the RMBS market than meeting some arbitrary deadline."

The AOFM exercises discretion with regard to the volume sold at each auction. If there are insufficient bids to meet the target volume at the reserve price, it will scale back.

Nicholl said the AOFM would continue with its practice of using reserve prices.

"Once set, we do not exercise judgment on whether to shift the reserve price in light of an examination of the bids we receive. To do so would cut across our objective of maintaining the highest standards of probity," he said.