Michael Ciota, manager, marketing and information services, and John Darr, managing director of finance
This year you issued a 10 year global which, it is understood, was necessary to offset a mortgage programme, over and above your members' normal funding needs. What was the background to that, and might you do another?
The successful 10 year global issued last May was related to the surge in mortgage assets, which have grown year to year by 95%, even with the volume of prepayments experienced so far this year.
All 12 Federal Home Loan Banks are now active in mortgage programmes. Nine banks participate in Mortgage Partnership Finance (MPF), which was launched in late 1997. Three banks participate in the Mortgage Purchase Programme (MPP), which began in 2000.
At the end of June 2002 those programmes totaled about $38bn. The MPF portion was $31bn and the MPP portion was $7.5bn at the end of the second quarter.
Given that continued strong growth is expected, it is very likely that the FHL Banks will revisit the 10 year sector sometime in the fourth quarter.
But your recent TAP cycle did not result in any 10 year sales...
The 10 year global was of sufficient size that not all of it was immediately deployed against our mortgage assets, so the remaining amount was hedged and basically warehoused.
During the last TAP cycle when various FHL Banks expressed interest in this sector, we were able to draw on this pool and redistribute portions where needed.
We might add that even after factoring in the additional costs associated with this process, the 10 year global money was very economical. At the same time, this issue has certainly performed well for investors.
How much funding have you issued this year in total?
By the end of July our bond settlements totalled $201bn, but if measured by trade date, the figure jumps to $219bn.
This difference reflects the increasing pace of issuance as the Treasury market took off, and August has brought more of the same. August bond trades could reach $50bn, which would be an all-time high for us by a considerable margin.
Is that off the back of a flight to quality?
Well, it is hard to say. A great deal of our activity this year is related to callable redemptions. The FHL Banks are known for their involvement in the callable sector, and a lot of issues are getting called and refinanced - this rally has meant that virtually everything that has been issued recently is now in the money.
Callable activity has been beyond busy. There have been days when we have done 50-70 separate callable deals.
So with the calls, would your issuance be up slightly year on year?
Issuance is up slightly year to year, as is the level of outstandings. We had $487bn in bonds outstanding at the end of last year and right now it is at $513bn, so it has not gone up that much in the last seven months.
The growth of our outstanding debt has slowed primarily due to a couple of factors.
The Federal Home Loan Banks are a co-operative, and as such, are not necessarily trying to get larger every quarter.
Our job is to support housing. We accomplish this by raising debt in the capital markets and lending the proceeds to our 8,000 members. There are times when our members do not need as much money.
For the last two years or so, deposits have reversed the trend of the 1990s and increased markedly; this pool of funds reduces the need for debt issuance.
Also, the US economy is not currently firing on all cylinders. So the surge in debt issuance can be attributed more to the high level of callable redemptions, and less to member demand for funds.
What changes have you made to your issuance techniques this year?
We made a few adjustments to our TAP issue programme recently - we now only hold a single series of TAP auctions every day rather than two. We feel there is an advantage to focusing attention and (hopefully) interest on a single daily event.
Also, we now have scheduled TAP Refunding Auctions (TRAs) at the beginning of each new TAP cycle, where we further aggregate member bank demand and hold a single auction of size for one or more of the four most active maturities (1-1/2, two, three and five years). The idea with the TRAs is to jump-start one or more of the TAP issues to get the size up earlier in the cycle, and to provide investors with the opportunity to roll maturing investments into a new TAP.
Prior to the TAP changes, we enhanced our large global programme by limiting large issues to a single re-opening, and making the minimum re-opening size $2bn.
FHLB is known as being an opportunistic Libor issuer, is that fair?
I prefer the term "flexible".
We are flexible because we cannot predict member demand for lending, but at the same time, we must be prepared to ramp up production at a moment's notice. Some of our programmes take a step towards calendar issuance in that the times and/or dates are scheduled, and with discount notes the maturities are also scheduled, but not the sizes. It is the way we need to do business.
What happens if the Libor levels are not available? How would an issuer like the Home Loan Banks adjust to that, to just issue off the TAPs?
Because we are flexible, we can do a variety of different structures and if there is one area that is not working in the market, either for us, for investors, or for dealers, then we can try something different. It goes back to the flexibility - we do not have to issue every month in a certain size.
That said, however, investors can count on the FHL Banks to be in the market every day, issuing quality products with the service to match.
Are you considering issuing in currencies other than the dollar?
We have done global issues in a number of currencies, but none since 1998. For us, the funding levels, as compared to pricing on a dollar basis, have not been there.
But, we do keep up to date on these markets, and are always open to opportunities. Our regulatory guidelines allow issuance in any currency as long as the country is rated AA- or better.
