When it comes to the future of supply, spreads and credit, three leading ABS researchers were mostly in agreement at last week's American Securitization Forum-hosted conference. On issues ranging from relative value to research conflicts (see related story), panelists showed little variance of opinion.
With the economy looking strong once again, the market is currently in a "sweet spot" for credit, said moderator Sanjeev Handa, head real estate portfolio manager at TIAA-CREF. The economic triggers that the Street will be watching for are inflation topping 2% and unemployment dipping below 5%, according to David Heike of Lehman Brothers.
While the hot topic seemed to be supply - particularly mortgage-related ABS supply - analysts do not expect drastic declines going forward. In order to maintain origination volume, analysts said they have seen the innovations from the prime sector being implemented down in credit.
But not to worry, the strengthening economy should offset the risks associated with the lower-credit borrower, they said.
"Expect lenders to move down in credit, particularly in a growth period," said JPMorgan Securities research head Chris Flanagan. Citing a product that has raised red flags recently, Flanagan added, "IO [mortgages] are a revolutionary product and will help fuel mortgage ABS growth."
Despite fears over the potential impact of the rising interest rate environment, these new mortgage products should allow borrowers to remain performing on their loans. "Lower payments equal better credit," Flanagan said.
Credit Suisse First Boston's Neil McPherson acknowledged the increased credit issues that arise in home equity subordinates as rates rise, adding that, "We are currently looking at [potential] payment shock."
Aside from some short-term movement, spreads for most asset classes are seen remaining stable throughout 2004, as the CDO bid remains strong. CSFB's McPherson estimated that up to $9 billion in structured finance CDOs are currently ramping up and will continue being buyers going forward.
TIAA-CREF's Handa chimed in that the spate of high-grade CDOs ramping up has supported triple-A spreads.
Lehman's Heike, who said that short-term triple-A fixed-rate spreads are at "theoretical tights" and that triple-Bs have reached their plateau, expects spreads to move sideways. JPMorgan's Flanagan concurred, noting, "Spreads may remain fairly tight for a fairly long time."
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