The asset-backed market posted its best year of relative value in 2003, according to returns tracked by researchers at Lehman Brothers. However, it was trounced by the unsecured credit market, which also enjoyed its best year to date. Driven by massive tightening in numerous sectors, The Lehman ABS Index returned 179 basis points of excess return versus Treasurys, Lehman reports, compared to the 310 basis points of returns seen in unsecured debt last year.

Beset by record-setting mortgage refinance activity, the MBS market was outshone by ABS by a 168 basis point margin.

The manufactured housing sector made the strongest showing within ABS, realizing 326 basis points in option-adjusted spread return on a 368 basis point tightening spree. Home equity ABS returned 103 basis points of OAS on 62 basis points of tightening.

Auto loan and credit card ABS returned 47 and 53 basis points of OAS, respectively, with spread tightening of 38 and 83 basis points. Stranded cost ABS, or rate reduction bonds, also had a strong year with 49 basis points of OAS returns and a significant 125 basis points in spread tightening.

"Outperformance in the first half of the year was driven by triple-A spread tightening, as investors sought safe harbor in short, liquid ABS bonds," Lehman researchers penned. "The second half of the year was marked by a shift to subordinates and off-the run paper as the corporate/high yield rally created compelling relative value opportunities in ABS."

The credit composition of the Lehman ABS Index changed dramatically in 2003 due to downgrades and the expansion of eligibility criteria. The triple- and double-A components of the index declined from over 96% to 93%,  while the single-A and triple-B rates components of the index increased from 1.7% to 22.5%.

The percentage of subordinate bonds in the Index increased in all sectors (except stranded cost ABS, which has no subordinate classes), yet the MH represented the largest percentage of subordinate ABS by far. With 22.5% Index-eligible ABS backed by MH, it nearly tripled the next closest asset class (credit cards with 8.4%) in subordinate representation. The primary difference is that while MH single-A and triple-B bonds have been downgraded to the current ratings, credit card subordinates have, on average, been larger due to de-linked issuance vehicles.


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