The collateralized debt obligation market is keeping an artificial lid on prices of some riskier bonds, according to researchers who warn the demand is creating a technical imbalance. Both Lehman Brothers and Bear Stearns analysts note in their latest asset-backed outlook reports that spreads on sub-prime home equities have stayed firm or even tightened recently.
The trend is counterintuitive given increasing concerns about the housing market and consumer health, as well as the higher risk premiums being applied to credit markets as a whole since the General Motors and Ford Motor Co. Even as senior, solid assets like triple-A credit card and student loan bonds have benefited from investor risk aversion in recent weeks, home equity subs have "somewhat perversely, tightened in recent weeks," wrote David Heike, head of ABS strategy at Lehman and the sector's top-ranked analyst in last year's Institutional Investor poll. He warns this trend is unlikely to continue and says triple-B spreads have reached unsustainably low levels.
Bear Stearns analysts, meanwhile, are more sanguine with their spread outlook and predicted in their latest strategy piece the buy-and-hold nature of CDOs and the decreasing pace of new sub-prime issuance should continue to bode well for spreads in the sector.