One year ago, bankers and researchers predicted asset-backed supply would fall for the first time ever in the market's history. They could not have been more wrong.
Fueled by nearly $500 billion in mortgage-related bonds, the U.S. securitization market exploded this year to more than $800 billion as low rates kept originations fast and furious and an improving consumer credit picture lured investors. The market's growth was startling, particularly because it came in a year that was expected to witness a drop in supply. Instead, sales of asset-backeds surpassed those of corporate bonds, according to The Bond Market Association. And investors looking for yield took note, with traditionally wider ABS spreads moving closer to their corporate counterparts.
"There's been a strong convergence in spreads on the consumer ABS side; you're going to see better convergence between ABS and corporates," said David Heike, head of ABS research at Lehman Brothers. Demand was boosted by the collateralized debt obligation bid, particularly for subordinates. Triple-B home equities tightened 55 basis points and triple-B cards narrowed 30bps to an all-time low as collateral managers scooped up high-yielding assets for arbitrage purposes.
The default swap market also began to develop, despite a lack of standardization from the International Swaps and Derivatives Association, with Bear Stearns apparently becoming the first to make markets in triple-B card protection (BW, 12/6).