Hockey's RMBS selldown flops

The Australian Office of Financial Management has again fallen well short of its target for the sale of its holdings of residential mortgage-backed securities, accepting bids for only A$96 million of the $500 million of securities on offer yesterday.

The initial sale on June 24 yielded $160 million of the $500 million of securities on offer.

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.

The AOFM's plan is to auction between $300 million and $500 million of RMBS a month.

On the day of each auction bids are submitted to a group of divestment panel members (bank counterparties). An undisclosed reserve price and fair value assessment are set for each security offered and bids are ranked against these criteria.

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 - as it clearly has done on the first two occasions.

The results suggest that either the AOFM's (and the Government's) price expectations are too high or bidders want too big a bargain.

After the first auction market commentators said the result indicated that investors were testing the water. The second result is more concerning for the AOFM.

The third auction is scheduled for August 18, when notes under the Barton, Conquest, Illawarra, Light Trust, SMHL, Torrens and Wide Bay trust programs will be offered.