Another record year is set to close in the European ABS market, with some estimates putting the 2005 tally close to the $350 billion mark. While most market players are expecting more growth from certain sectors in the market, the level of growth that has set the pace over the last few years is unlikely to hold.

Spreads are a lingering topic that kicked off 2005, with early predictions that the ABS sector would maintain tightening levels through the end of this year. Howard Esaki and Sarah Barton at Morgan Stanley expect European ABS spreads to outperform corporates because of relative spread stability in the sector. According to Morgan Stanley, European ABS has outperformed corporates on a total return basis by about 0.20% year-to-date. "Next year, ABS spreads will continue to show correlation with corporate spreads, but with less volatility, in our view," said the team at Morgan Stanley. "This has been the historical pattern for the more mature U.S. ABS market, and is starting to hold for Europe as well."

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