Spread tightening continues in the European ABS secondary market. Dutch paper has come in the most, followed by Italian.
At present, Dutch triple-A RMBS with a five-year average life trades at 75 to 80 basis points, while better-quality Italian RMBS five-year paper is trading at 120 basis points. Italian RMBS five-year paper with average pool quality is trading at 135 basis points.
Whether or not this tightening trend continues remains to be seen, but, at the moment, it looks as if issuers are mounting a careful return to market.Unicredit Group analysts estimated that around 80% of requests are stemming from potential investors, although the offers haven't swamped the market to the extent many players had expected.
Furthermore, the new money coming into the securitization market is no real match for the hundreds of billions of euros that are available for sale.
It's likely that the tightening trend will continue into the medium term. However, if there is no real sign of improvement in credit market fundamentals, particularly in the U.S. and key European market segments like the U.K., this positive spread movement is expected to ebb.
"If this crisis has one educational effect on investors which is already appearing, it is the following: Investors have indeed become very choosy," said Unicredit market traders. "Investment decisions within the capital structure are considered with extreme care. Quality is key and a sharp differentiation between high credit quality paper and not welcome paper is crystallizing."
Meanwhile, covered bonds are experiencing spread widening on the back of a supply/demand imbalance that, in this case, presents the market with an overabundance of paper that in the past weeks has had to pay dearly to get done. The month of April saw 12 new issues but the pipeline still remains full. Banks are also being forced to accept ever-higher issue premiums.
Banco Sabadell's new two-year paper - the first new Jumbo issue from Spain since November last year - priced at 53 basis points. Dresdner Kleinwort analysts said that no bank has ever paid a higher spread premium for a new Jumbo. "In view of the high spread volatility of Cedulas and the subdued prospects for the Spanish real estate market, willingness to buy the product has greatly diminished," analysts said.
This rise in new issue premiums has not been limited to high volatility segments of the market.
For instance, to place its new two-year mortgage Jumbo, Hypo Real Estate International recently had to offer a spread of nine basis points, which is relatively wide for a German issue, Dresdner analysts said. The stream of new mandates means that the trend will likely continue, which is also having an impact on the secondary market.
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