Asset-backed spreads are tighter than their benchmark. Spreads on some short-dated, triple-A credit card and auto loan transactions have inched below swap spreads, in what market participants are calling a historical first. They say the move is noteworthy because fixed-rate spreads have been grinding tighter for months and the swaps level was seen by some as an insurmountable hurdle. The move means some investors may find ABS paper less attractive, depending on their own funding levels and liability requirements. "Spreads have compacted beyond the risk/reward level," says Terry Crow, cio at Metropolitan West Securities, a buy-side firm in Los Angeles. Still, asset-backed spreads remain attractive relative to their corporate counterparts, he says, adding, "I'd rather hold my nose and buy asset-backeds at this level than buy corporate FRNs."
Traders say spreads on fixed-rate bonds tightened last week amid a virtual shutdown in the new issue market due to the second of two industry conferences in Arizona. "I've never made as many sales as tight as I have this week," says one trader. He adds investors have some aversion to short paper at below-benchmark levels. "Our benchmark is swaps so going through swaps is tricky; psychologically, it's definitely an issue."
A handful of trends are fueling the tighter spreads, according to traders. First off, the credit markets in general have experienced dramatic tightening due to improving fundamentals and expectations of an economic pick-up. Investors are also flush with cash due to strong appreciation last year. "There are a lot of people sitting on the sideline and cards have long been a cash substitute," explains one head of trading. Another issue is that continuing regulatory and accounting concerns about Fannie Mae and Freddie Mac are causing some high-quality monies to be invested away from the government-sponsored entities and into corporates and asset-backeds, leading to tight spreads on triple-A and double-A paper. "Some of the traditional players who would be in the agency market have been scared," says MetWest's Crow.
That being said, the pipeline is filling up now that the conferences are over and some traders expect the time for spreads below the benchmark will be short-lived because of technical pressures. "We're about to get some supply and that should ease a lot of the pressure," says one trader. But for now, he adds: "If I can get one-year paper at minus one I can sell it all day long."
