Time to give the ECB a bit more credit
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People and MarketsCommentLeader

Time to give the ECB a bit more credit

In the space of a week the European securitization market will have seen the first post-crisis residential mortgage backed securities from Ireland and Spain since 2007.

But even as new Irish lender Dilosk was pricing its debut RMBS last week, market participants were hesitant to thank the European Central Bank for helping bring new borrowers to the market.

The central bank began buying ABS bonds on November 21, 2014. Six months later it had purchased $6.13bn. And even those that were once worried the ECB would price already paper-starved investors out have been decrying the “disappointing” pace.

Of course, yield starvation has played its part in narrowing spreads, and Ireland and Spain have been considered something of the golden children of the periphery’s recovery. But a banker on this week’s Spanish RMBS — the first since 2007 — admitted that the market for such deals didn’t exist even six months ago.

For evidence of the ECB’s footprint, compare spreads on Dutch and UK prime RMSB. According to Markit, three to five year Dutch RMBS spreads have tightened from 35bp in January this year to 21.4bp. Deals out of the UK, which the ECB does not buy, have tightened only from 54.9bp to 50.3bp.

Some will argue that the effect is concentrated. The ECB has been picky, meaning it may well be concentrating on Dutch RMBS at the expense of other regions and asset classes.

But for better or worse, yield starved investors are looking further down the capital stack and further out on the credit spectrum. While there are good reasons to think that may be an unhealthy phenomenon, it may also help create a virtuous circle in which liquidity begins finally flowing to entities that have been shut out of the capital markets for nearly a decade.

And that would be just the effect the ECB is looking for.

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