Orlando, Fla. - Although the participants at the opening panel of IMN's conference were generally predicting a dip in ABS volume for 2007 - from 5% to 10% - they said that derivative product will drive issuance going forward.
The market has changed from a focus on cash transactions to synthetic and CDO offerings. Participants also pointed to the CDO bid as the reason why ABS market spreads remain historically tight.
According to panelists, spreads are usually a reflection of were people expect performance is going to be, and market participants still expect ABS performance to be good, despite the slowdown in the housing market and consumers being over extended.
"Spreads don't have a chance to widen out because of the amount of liquidity that is driven by the CDO bid," said Sanjeev Handa, head of global markets at TIAA-CREF. He added that CDOs, which have been very active buyers of lower rated home-equity tranches, are not natural sellers as they would not want to take a par loss on a cashflow structure.
MBIA's business reflects the overall market, which has been notably more active on the CDO side, Managing Director Paul Bernier said. However, he still expects significant issuance volume due to the overhang from hybrid ARMs. This would provide a decent amount of refinancing business from people moving out of hybrid ARMs into fixed rates.
Although structured product spreads are tight on a historical and absolute basis, they remain in line with spreads in terms of the entire credit sphere, said Richard D'Albert, managing director and head of the securitized products group at Deutsche Bank.
Eyes are focused on the performance of the housing market as the ability of consumers to take out home-equity has buoyed up the economy, and other ABS asset classes, specifically credit cards.
An interesting bell weather to housing market performance would be charge offs and delinquencies in the credit card sector, said William Haley, managing director at ABN Amro. Fitch Ratings Managing Director and panel moderator Kevin Duignan added that this could also be seen in the monthly payment and utilization rates for credit cards.
Even though the indicators for housing are not very positive, considering the aforementioned slowdown and higher short-term rates, Deutsche's D'Albert said that one has to take a more nuanced approach to looking at what impact these indicators would have on the performance of the home-equity sector. Because even with the current rate environment pushing down performance, participants should go back and look at fundamentals, specifically the positive employment picture, which makes consumers well positioned to deal with rising rates.
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