There’s little doubt that interest rates are headed higher. In a poll of attendees at Information Management Network’s ABS East conference Tuesday, 55% said they expect the Federal Reserve to pull the trigger next year.
Less clear is how this will affect pricing.
Higher interest rates will create “a lot of tiering” among deals, predicts Fowad Sheikh, portfolio manager at GRK Partners. Sheikh also believes that investors will migrate back to less rate-sensitive bonds which he said included those with short durations or floating rates.
But real money investors who have to buy in the ABS market may welcome higher returns. Brian Loo, managing director at Garrison Point Capital, said that the current low-interest rate environment forces buyers to think hard about alternatives. “If you are in any sort of index product where you are forced to buy at these rates then you have to start getting creative and think a little bit more about what you could do in private financing,” he said.
Jim Ahern, managing director at Moody’s Investors Service, thinks the market is attractive even at current rates. “The market is risk-on, liquidity is good and spreads are right at or below pre-crisis level for most asset classes,” he said.
Yet Ahern said that investors needed to pay heed to warning signs, such as the deterioration of underwriting standards in commercial mortgage-backed securities (CMBS) and auto loans; higher loan-to-value ratios in CMBS; and more covenant-lite collateralized loan obligations.
These trends could make the market more vulnerable to the impact of regulatory changes much discussed at this year’s conference.