The Australian Office of Financial Management (AOFM) today announced that it will be selling the entire portfolio of residential mortgage backed securities (RMBS) it bought to support the banking system during the GFC.
This is a big deal because it is a test for the strength of, and liquidity in, the Australian RMBS market.
The government purchase of these instruments when nobody else wanted them was a critical source of funding for Australia’s banks as uncertainty about the quality of housing loans worldwide plunged the global financial industry into crisis.
It’s also RMBS which are now the cornerstone emergency liquidity backstop for the Australian banking system under the Reserve Bank’s bank’s huge emergency liquidity facility. This facility allows banks to give the RBA RMBS in times of trouble in exchange for cash.
So the AOFM acknowledgement that it is “mindful of the potential for the divestment program to impact the RMBS market,” and that “subject to market conditions, the AOFM expects to sell $300-500 million of RMBS per calendar month,” is an indictment on the structure, functioning and liquidity of Australia’s RMBS market.
That won’t surprise market participants, given RMBS are usually buy-to-hold investments. But, it’s an important test and is likely to inform the size of “haircuts”, or discounts to face value, the RBA will charge Australian banks in times of trouble.