A variety of challenges face the ABS market both long and short term and in response to concerns, the American Securitization Forum is hosting its annual meeting this month, with a focus on communicating relevant topics to a broad market audience.
Audience members at the panel titled Market Color: Traders' and Strategists' Mid-Year Assessment of the ABS and MBS Markets can expect to hear discussions on issuance and spreads, the housing market, consumer credit, performance of corporate securities versus asset-backed securities, CDOs and market technicals, in addition to relative value in the marketplace and regulation, said moderator Dan Stachel, principal at State Street Global Advisors.
"We're trying to set the table for the rest of the conference," said Stachel. "Discussions will include everything from regulation to relative value."
"Issuance is going to remain fairly strong, particularly driven by the heavy home-equity [ABS] volume," said Lehman Brothers strategist David Heike, an expected panelist. "On spreads, most consumer ABS is fairly valued. Cars and student loans are also fairly valued, but auto and home equity loans are going to weaken," he said.
Panelists for the session will also include Rod Dubitsky, director at Credit Suisse First Boston; Stuart Goldberg, director at Citigroup Global Markets; Rocky Kurita, managing director at Deutsche Bank Securities and Heike.
On the auto side, spreads are going to be dragged wider partly by contingents from the corporate bond market and also because of increased issuance volume from Ford Motor Credit and General Motors Acceptance Corp., explained Heike. Home equity is going to weaken because of growing concerns around the housing market and because of reduced volume of ABS CDO issuance, he added.
"The arbitrage for ABS CDOs has become challenging because of tight spreads and increased volatility in the CDO market," said Heike. "That's generally why we're bearish on the ABS market right now."
However, ABS offers attractive risk awards versus corporates, Heike added. It is a more stable market with more stable ratings, he said. The Sharpe ratio in ABS is historically much better - two times what it would be in the corporate or high yield market, he said.
"Given the relatively flat yield curve and the uncertainty around rates, there's been some strong bids for short cash substitutes and that's going to prevent a significant widening in ABS spreads," according to Heike. "Spreads are going to weaken particularly in home equities and autos, but there's a very strong demand technicals for ABS, coming from demand for short paper from U.S. investors."
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