The widening spread between credit default swaps on asset-backed securities and cash ABS bonds could be a boost for synthetic structured finance collateralized debt obligations, especially those backed by mezzanine home equity ABS. BBB HEL ABS CDS spreads went from five basis points tighter than cash ABS a month ago to 35bps wider. BBB minus spreads widened even further, to 75bps from 25bps.
Some market participants speculated the spreads widened as demand for ABS CDS was bid up by investors. "The players on CDS of ABS are more pessimistic on the housing market," said Michiko Whetten, quantitative credit analyst at Nomura Securities International.
Cheapening ABS swaps could spur CDOs still in their reinvestment periods to replace bonds that have paid down synthetically instead of with cash, according to David Yan, senior CDO analyst at Credit Suisse First Boston.
Similarly, this could lead to greater all synthetic issuance. "I would not be surprised to see 50% growth in synthetic issuance," Yan said of next year's issuance.
