Spreads have enjoyed a “slight tightening bias”, said an ABS trader on Thursday, who described the overall feel of the market as “positive”.
He noted that secondary market sellers had been circulating lists of deals where bids were sought in competition (BWICs).
“There’s been quite a bit of two-way BWIC supply met with good client demand,” said the same person.
“Overall sentiment is firm with a slight eye on the potential for primary supply,” which he said would typically be expected to surge in the third and fourth week of January.
One BWIC list that was circulated on Wednesday contained seven CLO notes which had a credit rating of single-B. Four of these immediately traded and the remainder were sold on Thursday.
Single-B rated CLO notes usually print around 920bp-940bp for a 9.5 year weighted average life.
But in this particular case, the deals were priced to the call period which, being two years after the reinvestment period, equated to a maturity of 6.5 or seven years. These notes were traded in the mid-to high 800bp range which was deemed a “solid execution”.
According to Prytania Solutions, which provide valuations across the full capital structure on structured credit assets, single-B CLOs were trading at 871bp on Wednesday, a staggering 15bp tighter compared to the week before.
ABS ready for rates volatility
Triple-A CLO spreads were indicated 0.5bp tighter on the week, at 112bp, and double-As were seen almost 9bp tighter on the week at 151bp.
European ABS and RMBS spreads were also all broadly tighter by 2bp-4bp on the week, with UK and Dutch prime triple-A levels seen at 36bp and 37bp respectively.
Despite the constructive tone, bankers were under no illusion that the less stable macro-economic backdrop was likely to create rates volatility. The European Central Bank and Federal Reserve are both set to embark on a tapering of asset purchases this year.
More pointedly, minutes of the December Federal Open Market Committee meeting showed that the pace rate hikes may need to be increased if inflation proves stubbornly high.
Even so, participants remain optimistic that ABS and CLO spreads, which are priced on a floating rate basis, will weather the oncoming storm.
Short maturing floating rate notes that dominate ABS issuance arguably offer the perfect hedge in a rising rates environment.
Added to this the European Central Bank should provide good support for spreads. Rabobank researchers noted in an outlook report published on Wednesday that ABS redemptions in the ECB’s Asset Purchase Programme amount to more than €10bn this year, equating to 35% of its total ABS holdings.
Since the start of 2020 the ECB has focussed on shorter-dated auto and consumer ABS paper which has had the effect of driving redemptions higher “ensuring the continued and strong presence of the ECB in primary and secondary ABS markets,” said the analysts.
