The amount of retained European RMBS now exceeds that placed with investors, according to analysis by Barclays Capital.
The dearth of new public issuance, coupled with steady amortisation of outstanding deals despite lower prepayments, means that in many jurisdictions less than half of all bonds placed are still outstanding. In the UK, just 41%, or Eu151bn, of prime RMBS placed with investors remains.
Conversely, the bulk of retained deals were issued in the last two years and still have plenty of bonds outstanding — more than 90% everywhere but the UK, where the figure is 84%.
Furthermore, the precipitous decline in prepayment rates on mortgages and fears that banks might not call bonds at their step-up dates have yet to translate into much slower redemption speeds for placed deals. Barclays estimates that annualised paydown rates are 23% for UK prime RMBS and 19% for UK non-conforming RMBS. Payment rates are much lower, however, for retained deals with more recently originated loans.
These numbers partly explain the steady tightening of spreads in recent months as, even with a limited number of buyers, bonds have become harder and harder to obtain.
"It would appear that of the bonds that were placed, many have simply paid off in full, or at least have amortised to a significant extent," wrote Reto Bachmann, co-head of securitisation research at Barclays in London. "And of those that remain, many would appear to have found a largely permanent holder, either because they are very seasoned, or because they have been locked away in some form of bank assistance scheme.
"Significant paydowns and permanent holders would seem to amply explain the current scarcity of paper in the secondary market. Incidentally, it would also explain the interest of buyers: with bond valuations low, and bonds continuing to amortise apace, expected RMBS returns should prove attractive overall."