Over the last two months, ASR has reported weekly that as corporate and high-yield markets have experienced a great amount of volatility, the asset-backed securities market has been able to hold its own and not let the outside factors influence it. A new report by PaineWebber has addressed what factors have kept ABS sheltered.
The main factor is diversification of asset-backed securities pools. "You're looking at pools which are loans and receivables from across the country," said Tom Zimmerman, director of research at PaineWebber. "Diversification across all sorts of people, all sorts of walks of life, and all sorts of parts of the country gives you a diversification which you're not going to get by buying a corporate bond, which is subject to event risk by that corporation, or even a specific industrial segment can have a problem."
Because pools consist of a multitude of consumer loans and receivables, one bankruptcy in the pool would not affect the pool severely.
Another reason ABS has outperformed other credit-sensitive markets is the economic slowdown. According to the report, "Already the dot-com industry has experienced a severe realignment. And the high-tech sector in general has also been hit hard." If the economy slips further, ABS should continue to perform well.
"With the ABS, you're going to have to have a country-wide recession to have serious problems," Zimmerman said. "It's not just going to be isolated to the telecom industry or the high-tech industry. Certain industrial sectors can have problems and cause headaches in the high-yield market and the corporate bond market and still the asset-backed market can still do pretty well."
For corporates, 10-year industrials have widened 17 basis points versus the swap market since early September and "A banks" widened about 20 basis points, according to the report.
"While this carnage has been going on in the stock, high yield, and corporate bond markets, very little has happened to ABS," the report stated.
Case-in-point, credit cards are only zero to four basis points wider, auto receivables are two to four basis points wider and the seven- and 10-year tranches of home-equity loans are 10 basis points tighter than they were mid-summer.
Going forward, PaineWebber expects ABS to "continue performing better than corporates if there is a further slowing in the economy. On the other hand, if the economy stabilizes and recession threats fade, then corporates are positioned to outperform most other markets, including ABS." However, the firm advises that it's not a good idea to overweight ABS versus corporates at this point.
Zimmerman said the economy is giving mixed signals on the rate it is slowing, but ABS will hold fairly stable through the end of the year.
