Bulk Of Fed's Subprime Bonds Sold Despite Waning Interest

The Federal Reserve Bank of New York has sold the bulk--38 out of 41--subprime bonds on offer this week even though industry participants say interest in the bank's weekly auctions is waning.

Two subprime bonds out of the original list of 43 did not trade because of a technical issue, according to people familiar with the matter.

The bank is selling subprime bonds that it acquired from American International Group Inc. (AIG) in 2008. On Wednesday, the bank was originally scheduled to sell 43 bonds with a current face value of a little over $2 billion.

The securities sold on Wednesday have a current face value of $1.77 billion.

The bank is selling these bonds on a weekly basis.

"The auctions are becoming a grind and this could have a negative impact on prices," said Jesse Litvak, a senior mortgage trading executive at Jefferies & Co. in Stamford, Conn. "If we have 15 more weeks of auctions like this, it will affect prices."

Instead, Litvak said, the Fed could allow buyers to purchase larger chunks of these lists: "The Fed could let it be known that they would be open to reverse inquiry and engage large portfolio bids."

The Fed's first-ever auction of such securities was held on April 6, when the central bank, through a unit of BlackRock Inc. (BLK), sold $1.3 billion of the $1.5 billion bonds it had offered.

The New York Fed is to sell all the assets in Maiden Lane II, which holds roughly 800 securities with a total fair market value of $15.9 billion, according to Fed data. The total face value is roughly $30 billion.

The Fed has not set a time-table for the sale of these bonds. It has said it will sell these assets "over time as market conditions warrant through a competitive sales process."

-By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227; anusha.shrivastava@dowjones.com

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