Dwindling home price appreciation has its perks after all. After ending the first half with issuance flat to the same period last year, the ABS market is poised to do a bit better for the rest of 2006, owing mainly to strong performances from the student loan and credit card sectors.
The more technical aspects of the ABS market grabbed most of the attention in the first half of 2006, wrote Peter DiMartino, managing director of ABS and mortgage credit strategy at RBS Greenwich Capital. ABS spreads tightened significantly across all products, credits and maturities, he wrote, as investors and issuers both benefited from demand for yield. In particular, "double-A and single-A HELs were 13 to 35 basis points tighter, with cards two to six basis points tighter and autos, equipment and student loans two to seven basis points tighter."
Going into the second half, analysts expect economic fundamentals to hold more sway over the markets. Mortgage rates are on the rise, slower housing turnover, and slower home price appreciation rates "will affect mortgage performance and could have a spill over affect in the performance of other consumer sectors."
Forty-year mortgages will increasingly back sub-prime mortgage pools, DiMartino wrote. While skeptics of interest-only might have reason to breathe easier, as I/O concentrations decrease in the latter half of the year, piggyback second-lien mortgages will not diminish much.
As for those ABS credit spreads, they will remain on the tighter side of first-half averages through the summer and then hit a soft patch as September and October roll around, DiMartino said. Triple-A floating-rate spreads should sustain good demand in the second half from all sorts of investors who favor short duration, liquidity and high-quality fixed-income investments. The ABS market might see some crossover investors invest in credit cards, transition bonds and student loan ABS, especially as they look for liquid alternatives to agency paper.
DiMartino questioned whether credit card ABS issuance could remain as strong in the second half as it did in the first, adding that issuance could converge on historic average.
True enough, close to 70% of potential credit-card issuance was front-loaded in the first half of 2006, with more than $41 billion of scheduled maturities rolling off in that period, Juliet Jones of Barclays Capital wrote in US Credit Cards: Reading the Cards. An additional $20 billion is expected to mature in the second half. While new supply is not expected to be as robust in the second half as it was through June, the housing market could come into play to help shore up issuance.
"Expectations for slower home price appreciation, together with higher interest rates, could lead to lower mortgage originations and home equity lending," said Jones. "This could result in greater receivables growth and issuance."
The retail sector, which has been a formidable source of account portfolios for private-label issuers, continues to contract. Among those left standing are Target, Nordstrom, Sterling Jewelers, and Charming Shoppes.
On the consumer level, performance will post positive results for the second half, Jones said. "Payment rates displayed a strong upward bias, reaching record levels," she said. "This bodes well for the sector, and we expect the credit environment to remain favorable throughout the year."
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