Undoubtedly, the Bank of England’s Term Funding Scheme (TFS), which offers cheap four year funding, will depress the volume of RMBS paper from UK banks and building societies eligible for the scheme.
But this could be exactly what the market needs to level the playing field for issuers and make the instrument a more meaningful funding tool.
With a deluge of legacy mortgage portfolio disposals over the past year, spreads had been firmly in the favour of investors until the end of this summer. Domestic and foreign accounts have enjoyed healthy spread premiums, helping private equity firms clear out large swathes of legacy assets.
But this has kept spreads wide enough to deter many traditional bank and building society issuers from bringing new deals to the market. Covered bonds, offering a much tighter funding alternative, have been the main beneficiary.
This trend shifted with the announcement of the TFS. Coupled with the renewed interest of many investors in structured finance as the supply of positive yielding bonds dwindled, the prospect of a supply shortage caused a sharp and sustained rally in UK RMBS spreads.
Private equity firms jumped on the rally to force out arbitrage deals. Now Yorkshire Building Society, with its new Brass No 5 deal, has shown the window is also open for more vanilla deals backed by newly originated assets.
Given that Yorkshire Building Society had not issued since October 2014, the deal is far more than a case of simply maintaining the franchise or brand with investors.
The TFS may offer exceptionally cheap funding but every treasurer knows that it would be foolish to rely too heavily on one source of finance. Spread tightening in UK RMBS should make the asset class more attractive on a relative basis, not only for diversification.
Alongside the European Central Bank trimming haircuts to ABS tranches eligible for repo — bringing the asset class closer to covered bonds — the dynamics at play in UK RMBS should mean the asset class becomes a more significant funding tool for banks and building societies.