Despite intense volatility buffeting the Eurozone in recent months, Bank of America Merrill Lynch sees long-term strengths in the region’s structured finance space.
In a report, BofAML analysts said that these strengths could spur a market recovery, provided the European Central Bank takes certain measures, which is likely in the bank's view given the dire state of the Eurozone economy.
The report cites several strengths.
One is that ECB policy moves would push investors into fixed-income instruments in general.
Another is that, even though SF deals are getting hit indirectly by bank downgrades, they can still reach ‘AAA,’ in contrast to the diminishing ‘AAA’ universe in sovereigns, banks, and covered bonds.
In addition, there is a dwindling spread volatility of core SF products in comparison with the growing spread volatility and covariance in banks, sovereigns and covered bonds. BofAML analysts also pointed out that all sectors are experiencing limited, SF-bond supply.
As a result, BofAML predicts that the likelihood of a fire sale of SF legacy assets is still small, although it will rise in Q3 and Q4 after slowing down in Q1 2012 from 2H 2011.