The cheapness in five-year fixed-rate home equity ABS has narrowed early this year, sparking debate as to whether any potential extension risk is worth the spread pickup. Since five-year home equities widened to over 90 basis points over Libor in 4Q03, investors have bid spreads into roughly 70 basis points over, but the pickup between the two sectors remains well outside of historical levels.

Peter DiMartino, head of ABS research at RBS Greenwich Capital, recommends five-year HEL paper and has told investors to move into five-year from three-year paper. DiMartino credits the persistent wide spreads to "misguided extension concerns," and he advised investors that "while generic five-year HELs may underperform NAS bonds in a rally, extension risk in a selloff appears to be minor."

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