FHLB Canceled Short-Term Debt Auction Thursday Amid Turmoil
09/19 02:54 PM
NEW YORK (Dow Jones)--At the height of the turmoil in financial markets on Thursday, the Federal Home Loan Banks canceled its auction of discount notes due to the dislocation in the short-term funding markets.
However, the FHLB said it was able to raise $41 billion through negotiations with clients outside of the auction process.
"We elected not to have the discount note auction yesterday because we negotiated more than $41 billion in discount notes during the first two hours after the open," said Mike Ciota, a spokesman for the agency, confirmed on Friday.
Ciota said he would not comment on speculation that the FHLB was forced to cancel the auction due to lack of interest as many money market funds flooded into Treasury bills.
The spokesman did say, however, that the company's ability to place the $41 billion of notes demonstrated investor demand was still intact.
The system of 12 regional banks typically uses these notes to raise money for its operations, and these are of maturities one year and less.
The discount note auctions are held every Tuesday and Thursday. The agency says it will raise $2.8 trillion through such notes this year.
However, investors who typically consider these securities as safe options were spooked this week. The complete meltdown of the financial markets made investors flee to safe-haven Treasury notes for most of this week.
"This temporary lack of demand for non-Treasury assets was part of the driving force behind the decision earlier this week by the FHLB to cancel its discount note auction," said a Scott Peng-led analyst team at Citi in a research note.
Another analyst said investors were shying away from debt that carried maturities longer than a month in the discount note market, which pushed the market used by all government sponsored enterprises, including Fannie Mae (FNM:$0.7700,$0.2800,57.14%) and Freddie Mac (FRE:$0.6037,$0.2737,82.94%) into a tailspin on Thursday.
On Friday, the Federal Reserve announced that it would buy these agency discount notes directly from primary dealers as another means of getting short- term markets back on track.
The first auction takes place Friday, with bids due by 3 p.m.
-By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@ dowjones.com
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09-19-081454ET
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