The best opportunity in the ABS market can be found in the triple-A home equity sector as spreads have widened to the mid-30 basis point to Libor range. The trend to wider home equity spreads bucks the general tightening trend of other asset classes such as credit card and three-year U.K. MBSs. "With the recent positive economic news, especially the employment pick-up, most consumer credit card spreads have continued to ratchet in," writes Thomas Zimmerman, head of ABS research for UBS. "But home [equities] are the exception."
Chip Schorin, head of ABS research at Morgan Stanley, sees the wide triple-A home equity spreads as the best value in the market while the rest of the ABS sector is relatively tight. Schorin specifically notes that subordinated spreads are tight, driven by high CDO demand. Schorin added that in addition to the expected slowdown in supply due to less refinancing activity in the higher rate environment, there has been an increase in the global investor base, which will cause spreads to come in to some degree.
Christopher Flanagan, head of JPMorgan Securities' global structured finance research, wrote that triple-A home equity have lagged behind in the tightening trend that has compressed spreads elsewhere in the ABS market. "We think triple-A floaters have more room to tighten relative to other sectors. As we draw towards year end, the primary ABS market will likely quiet down in December as in previous years," writes Flanagan.
Credit Suisse First Boston and Deutsche Bank Securities ABS research teams both saw home equity supply as dominating the ABS calendar with CSFB reporting issuance made up $7.5 billion, or 67%, of the $11 billion in new issues in the ABS market last week.
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