The rapid progresison of AI has so far not bothered the European asset-backed securities market, despite the technology making its presence felt across other parts of the capital markets
Indeed, securitization continued a strong start to the year last week, by snapping back to life after only a brief pause triggered by the US and Israel's strikes on Iran.
In some places, prices are reacting to AI news. Most notably, software equities and loans have slumped as investors fear AI-powered challengers could disrupt their businesses.
Much talked about is the potential impact on the labour market if significant numbers of jobs are automated, but it seems so far that little cash is moving in response.
Unemployment is the largest factor determining the performance in consumer sectors of the European ABS market, but pricing this year suggests that investors are not yet concerned about a dislocation in labour markets.
Some certainly have AI on their radar, but at this stage it is one among many worries and not something that is moving the bid.
Besides, as with most things in securitization, investors rightly expect that the impact of disruption from AI will play out in the US first, given European economic structures are harder to disrupt and regulation provides extra protection for workers.
However, markets are priced based on expectations not just the present, so it is a complacent view to think that European investors do not need to get ahead of this.
Particularly challenging is AI’s potential to flip where strain shows. An AI-driven dislocation would primarily effect those working in jobs that can be automated — typically well paid work and in traditionally secure sectors.
In a less severe scenario, securitization structures and the inherent diversity within portfolios should protect most investors.
That will not be the case if investors find themselves exposed to a pool concentrated on a badly affected sector, however. Such deals may be out there. Certain specialist mortgage lenders for instance distinguish their products by developing expertise in underwriting loans made to people with specific, complex incomes, which could lead to portfolios concentrated on particular economic sectors.
If AI disruption is quicker than expected, the consequences will be more sever. Economists have varying models how things play out for the aggregate job market, but there is little doubt that AI disruption would become a central story for the ABS market.
The crucial point is that these considerations are much closer than many are allowing for.
You do not have to look far for a precedent. The software sell-off has put AI at the top of CLO managers' to do list and things are progressing quickly. AI and semiconductor research firm SemiAnalysis estimates Anthropic’s Claude Code is now responsible for 4% public GitHub commits, a measure of how many code updates on GitHub, which is a public code library are being made by AI, up from effectively zero a year ago. The researchers project that could hit 20% by the end of the year.
AI has already surpassed what its sceptics imagined possible. Yet, there’s still time to act decisively and get ahead of its impact. Securitization market participants would be wise not to delay.