Bond Question

This doesn’t really relate to any material in general but I was wondering, for a portfolio of bonds, which are satisfying the remaining requirements of say, a mortgage, also known as a defeasance, would it better to buy the portfolio in the beginning of the month or the end of the month, or does it not really matter.

Brood, this is a pretty convoluted question, but I’ll take a shot at what I think you’re asking. Most MBS pay on the 25th of the month, but that’s not an issue as you’re going to get the accrued if you buy before or after that. I imagine you’re referencing what’s happening in the ABCP and SIV markets right now - let me know if this is what you were asking or if I missed your question completely. P.S. - Unless you accidentally totally mis-worded your post, your understanding of what defeasance means is totally incorrect.

Why would beginning of month versus end of month matter? I think you get all your ducks in a row by setting up the successor borrower (or whatever it’s called), get all you legal docs together, deal with ratings agencies if that’s an issue, and all the other stuff you need to do. Then you just get out your defeasance calculator and start wiring around money and bonds. The mortgage payments are unaffected by the defeasance. Now obviously if you could predict bond prices you could do better, but if you can predict bond prices I can think of much better ways of making money than timing defeasances.

Definitely early in the month, ideally on the 3rd.

Skillionaire, My understanding of defeasance is not incorrect. I guess I was mistakenly trying to avoid detail but I should know from being on this forum that detail is essential. Let me try asking the question again. For instance, Joe REIT has a buyer lined up for some office building he owns in his portfolio. Because this building was financed at a fixed rate with conduit debt, Joe can’t just close the sale and pay off the mortgage. CMBS investors wouldn’t be too happy if all of a sudden all the future expected cash flows in their pool went away. His alternative is YM or Defeasance. Joe opts for Defeasance. He appoints a consultant who coordinates all of the third parties including Servicer’s, SS’s if needed, Borrower Attorneys, Servicer Attorneys, Rating Agencies, Title Companies, Custodians, Accountants, Broker-Dealers, etc. Let’s say he has a 10 year Anticipated Repayment Date on his loan at which time he will pay the interest for that period as well as the remaining balance of the loan, his balloon payment. His P&I payments are due on the 1st of every month. Provided he is out of lock out, the defeasance can have any number of closing dates. At the defeasance closing, the sale of his building has closed, and a portion of the proceeds from the sale is used to pay for the third party fees as well as a portfolio of securities sufficient enough to cover the remaining portion of P&I due on the mortgage. For simplicity we’ll say that the portfolio is made up of U.S. Treasuries and does not include Fannies or Freddies or any other illiquid securities like REFCOS or TVA. Prior to closing, on 10/1/2007, Joe decides that he wants the defeased payments to start with the 11/1 payment. In other words, he has cut a check to the servicer out of pocket for the Oct. 1 payment and between now and 11/1, can circle on securities and close his defeasance transaction. My question is, If the first maturity that needs to be accounted for is a month away, would he have any advantage circling and closing his defeasance in the early part of the month or the later part of the month, or is the timing irrelevant. I understand how accrued interest and bond pricing works but would he have any advantage paying less cash up front earlier in the month and just accruing the interest for the month or pay more cash towards the end of the month.

That’s about what I thought you meant and I still like my answer above. It matters big if you can predict bond prices, but otherwise you are just holding money in short term deposits rather than the longer term securities for the defeasance. Except in the sense that in some expected value way the bonds should outperform the short-term paper (which means at the end of the month the bonds will be more expensive than the interest you have gained in short-term stuff), there just is no difference. I certainly don’t claim any expertise on defeasance but I will claim some expertise on timing the bond market and it’s vary tough. Particularly with an out-of-control Fed.