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Derivatives

Synthetic ABS To Add To Cash Mart Volatility

Cash asset-backed securities could see more volatility as collateralized debt obligation managers increasingly turn to the synthetic market to ramp up assets.

Cash asset-backed securities could see more volatility as collateralized debt obligation managers increasingly turn to the synthetic market to ramp up assets. Slack in the CDO bid will also force cash ABS investors to scrutinize those deals further to price them appropriately, said Vikas Sarna, v.p. in securitized products trading at JPMorgan Securities, speaking at the American Securitization Forum Annual Conference last week.

With CDO managers gobbling up new issue ABS over the past couple of years, spreads on triple-B ABS had ground tighter. But, because ramping up a CDO is faster and easier in the synthetic market, that steady bid will increasingly experience some slack. As a result, triple-B ABS could see volatility jump by up to 20 basis points a day, Sarna estimated. He said it was difficult to estimate previous volatility levels. And while investors previously priced the bonds based solely on ratings, they will increasingly have to examine collateral, servicing and other aspects to price them, he said.

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