By Leslie Kramer
With the return of liquidity in the secondary asset-backed securities market, the question many market players are now facing is how to find value in the new low-yield environment. That question along with a look at the affects of government sponsored liquidity driving programs will be up for discussion during the "Unlocking Liquidity in the Secondary ABS Markets: Traders' and Investors' Roundtable" panel today.
Liquidity has, indeed, returned to the secondary ABS market and trading is robust, the panelists agree. Some of the market fervor has come from insurance companies and financial institutions that "missed out on most of the spread rally that occurred in 2009" but still need to invest, according to panelist David Castillo, senior managing director at Further Lane Securities. Additionally, money managers, such as hedge funds and mutual funds, "that promised investors they would capitalize on the dislocation that happened in 2008, but has rapidly gone away in 2009," are also looking for product, he noted. And an uptick in financing, albeit short term and somewhat expensive, has helped markets to start flowing once again, said panelist Sadie Gurley, managing director and senior portfolio manager at Marathon Asset Management.
With the return of liquidity the question now facing market players is: how does one find value in the low-yield environment? "From a liquidity standpoint there has been significant supply, but given the current run up in prices, the challenge is finding good opportunities," said Gurley. Compared to a year ago when buyers were few, there are now multiple bidders for assets. And while this increased interest is a good sign in terms of liquidity, "the enthusiasm for product has increased at a greater rate than what we think the value is of the underlying assets," noted Castillo. In fact, panel moderator Luis Amador, senior director at Moody's Analytics, plans to ask the panel if they think if the market is due for a correction.
Another issue on the minds of traders and investors is the impact that various government sponsored programs are having on market movement--often well before the programs have even been implemented. "The Term Asset-Backed Loan Facility has had a significant impact on the market, primarily because of the inclusion of a growing universe of commercial mortgage-backed securities," said Castillo. He adds that in some cases the rapid repayment of the TARP financing has significantly increased market liquidity by allowing larger banks and broker dealers to participate in the market on a principal basis."
In fact, TALF, as well as the Troubled Asset Relief Program, and the Public-Private Partnership Investment Program are all playing a major role in turning the markets around, but the impact has not all been positive, panelists agreed. "A big concern is that once those programs were announced it's like they were a self-fulfilling prophecy. The street got in front of those programs by buying as much paper as they could with the intention of trading into those platforms once they got built," said panelist John Calabrese, managing director at Guggenheim Capital Markets. Just the announcement of government sponsored liquidity to come has caused yield and spread compressions on trades that have not yet happened, he noted. "It has driven spreads so much that we are currently at yield levels that, even with leverage, don't achieve the initial kind of expectations prior to the rally," Calabrese said.
Given the rise in prices and tightening of yield caused by the PPIP over the last several months, the number of PPIP managers willing to invest has now decreased, Calabrese noted. But Gurley believes that attractive opportunities for PPIP managers still exist. "The leverage that you get from the Treasury really adds significantly to the returns and makes these assets still attractive," she said. There is still significant distress in some of the underlying assets, and delinquencies continues to rise, but "now that we have two years of good data, we are able to start making better predictions toward the outcome, and it gives us a lot more comfort in the prices we're buying them at," Gurley concluded.