Wall Street dealers will convene this week under the auspices of The Bond Market Association for the first time to discuss the burgeoning business in offering credit protection on asset-backed bonds. The market has shown a marked increase in recent weeks and months, even without standardized documentation from the International Swaps and Derivatives Association.
ISDA has said it will come out with standardization in the second quarter, but dealers are apparently meeting now to jumpstart the process. "It's a forum to discuss how we can move the process forward," said one sell-side official, referring to why the dealer trade group is getting involved in the process now. Calls to Nadine Cancell, v.p. at TBMA, who is leading the forum, were returned by Jon Teall, spokesman. "The market...appears to be on the verge of considerable growth. We are paying close attention to developments," he said, declining further comment.
Bear Stearns, for one, has recently begun making markets in triple-B credit card protection. "With spreads as tight as they are, it's not a bad time to consider putting on some protection," said Todd Kushman, associate director in fixed-income derivatives in New York.
A handful of factors are fueling the nascent market now. A surge in issuance this year, particularly mortgage-related, and spreads thistight are causing more investors to explore buying protection. Volume in the ABS market is nearly $770 billion year-to-date (including collateralized debt obligations), according to Deutsche Bank research. And spreads keep grinding tighter.
"The single-name market and the kind of activity we are seeing on a CUSIP-by-CUSIP basis are new. There's a strong bid for product so people are having a tough time sourcing it and on the other side, people don't like levels so you've got speculators chomping at the bit" looking to short asset-backed bonds, explained one researcher.
