Spreads on asset-backed bonds could experience material widening this year due to the development of a default swap market referenced to credit cards, autos and home equities, according to researchers. They say a liquid synthetic market would serve to sway the technical picture because it would result in an abundance of supply.
To be sure, there is still no standardization in the synthetic asset-backed market, although The Bond Market Association has recently stepped into the fray and established a committee to speed up the process (BW, 12/6). Yet the market is developing on an ad-hoc basis and if it becomes a viable alternative to cash bonds, it could pose a threat to spreads. The biggest threat would be to bonds in the lower parts of the capital structure; ironically, these have experienced the most dramatic spread tightening and would thus seem to have most to lose if that favorable technical picture is reversed. "One of the reasons why triple-Bs have tightened in is there is so little supply; suddenly, you could go the other way" and have too much of it, noted Gyan Sinha, senior managing director in ABS research at Bear Stearns in New York. On the flip side, triple-As would benefit from the development of a broader pool of exposure means through the synthetic market because it would bring cash prices more in line with true risk levels, he wrote in his outlook for the year.