Issuers of housing bonds in New York have purchased each other's variable-rate bonds in the past month as spiking interest rates have exceeded Treasuries.
Since mid-September, the New York City Housing Development Corp. has purchased about $150 million of variable-rate bonds from the New York State Housing Finance Agency backed by Fannie Mae. The State of New York Mortgage Agency and HFA have bought $50.5 million of each other's bonds - the first time this has ever happened. The spread between Treasuries and the agencies' debt widened to the point that the issuers said it made sense to buy the bonds instead.
"Because of the market dislocation we were able to increase yield on our investments by buying highly rated securities and at the same time support the market for housing bonds," Richard Froehlich, HDC general counsel and executive vice president for capital markets, said in an e-mail. "We understood the credit underlying the HFA bonds - mostly Fannie Mae - so it was not a hard investment decision for us."
The agencies bought the bonds in the secondary market for their reserve and escrow accounts, for which they typically would buy U.S. Treasury debt. Rates on VRDOs have shot up over the past three weeks as money markets tendered bonds. More than $1 billion of HFA bonds have been tendered since last month and of those about $330 million were put back to liquidity providers.
A "little more" than $100 million of HDC bonds were tendered since mid-September, but most have been remarketed, Froehlich said.
The Securities Industry and Financial Markets Association swap index, which is compiled from seven-day VRDO rates, swung from 1.63% on Sept. 3 to 7.96% on Sept. 24 to 5.74% on Oct. 1.
At the same time, one-month Treasury bills swung the opposite direction, dropping from 1.561% on Sept. 3 to 0.152% on Sept. 24 before rising to 0.593% on Oct. 1. They closed at a 52-week low of 0.056% on Friday. Three-month Treasury bills followed a similar trajectory, from 1.688% on Sept. 3 to 0.188% on Friday.
"We believed that there was enormous overreaction by the market and that a lot of good paper had been dumped by money market funds" Froehlich said.
The HFA purchased $45 million SONYMA Series 153 bonds last week at 6.25% while one-month Treasuries were yielding 0.13% and three-month Treasuries were yielding 0.67%.
"Right now it turns out that variable-rate bonds like ours are paying more than Treasuries, so it makes sense to buy them," said HFA and SONYMA spokesman Philip Lentz. SONYMA's VRDOs had been yielding below 2% before rates began spiking, he said. The agencies purchased the bonds as short-term investments. SONYMA and HFA are separate issuers but are more or less run jointly.
SONYMA's mortgage insurance fund purchased $5.5 million of HFA service contract obligation revenue bonds over the past three weeks in several transactions. The HFA bonds are backed by New York rather than housing developments. SONYMA's purchases the bonds represent a small portion of the mortgage insurance fund's investments which total $1.2 billion.
The HFA and HDC sell bonds for multifamily housing and SONYMA sells bonds to provide mortgages for single-family homes. The agencies said that they are permitted to purchase each others bonds by statute.
The HDC is still buying municipal bonds but no longer HFA bonds because the inventory is gone, Froehlich said. The agency didn't want to buy its own debt because of statutory limitations that would have effectively redeemed those bonds when purchased, regardless of new tax rules that permit such purchases, he said.
Ongoing market turmoil delayed a $250 million SONYMA bond deal two weeks, ago prompting the agency to essentially stop discounting the mortgages it offers.
The HFA has sold $1.02 billion of bonds so far this year and SONYMA has sold $264.5 million, according to Thomson Reuters. Last year they sold $1.12 billion and $415 million respectively. HDC has sold $703.4 million so far this year and $622.7 million last year.
