Stocks rallied on Monday, adding to Friday's gains following a positive job report which showed that 2.5 million people were hired in May. The outlook also improved as New York City reopened, boosting the outlook that the economy will recover as key cities come back online.
Riding the wave of optimism, more issuers have tapped the ABS market in recent weeks, ranging from plain vanilla auto sponsors to solar finance companies. Eleven deals worth $5.8bn were priced last week, according to Wells Fargo, while two solar ABS issuers and subprime auto finance company Westlake Financial filed ABS 15-G document since Friday.
“ABS investors really ride off of transparency. They are addicted to checking TRACE to see where ABS bonds are printing,” said a portfolio manager at a boutique investment firm. “As we got closer to the launch of TALF 2.0, we started seeing healthy new issue volume and oversubscriptions at the beginning of May. That demand, with the transparency factor kicking in, had pretty big benefits.”
Even compared to a few weeks ago, demand and spreads have recovered significantly as market participants saw that their worst case scenarios never materialized, according to John Kerschner, head of US securitized products and portfolio manager at Janus Henderson. With capital to deploy but fewer deals to go around, investors are grabbing whatever they can, at times causing double digit oversubscriptions.
“Fear of missing out is a strong motivator for investors,” said Kerschner. “Especially in a zero interest rate environment, bonds are being taken up quickly.”
Another factor boosting investor confidence is recovery in used vehicle valuations, despite headlines around rental car company Hertz’ fleet liquidation following a Chapter 11 bankruptcy. According to car auction company Manheim, wholesale used vehicle prices made a “strong rebound” after a historic fall in April, increasing 8.96% month over month in May.
Investors added that TALF 2.0 is serving as an effective market stabilizer in the backdrop. Though tight spreads in TALF-eligible asset classes means investors won’t be able to make high double digit returns as they’d hoped, the program is still a critical pillar propping up the the market. The TALF program's first subscription date is slated for next Wednesday.
Come fall and winter, if the virus makes a resurgence, TALF 2.0 will serve as a backstopping mechanism preventing spreads to widen out as much as it did in March, sources said.
“Since TALF is in play, the program will provide a backstop. We didn’t have a backstop in March, which is why spreads got to 400bp over in the depths of the sell offs. I don’t think that will happen with TALF fully operational,” said the portfolio manager. “The idea would be that the Fed can come in quicker than it did before, which should give confidence to investors that they don’t need to sell their bonds. It’s an important factor that changes the calculus.”