Securitization spreads in Europe have held up and continue to trade at relatively tight levels, said Unicredit analysts.
“Price recovery continues as a result of the credit spread rally, which took a breather this week compared to the pace of ABS spread tightening earlier,” said analysts. “Overall, risk appetite remains high and yield-hungry investors increasingly move down the capital structure or focus on asset classes exposed to relatively higher credit risk, such as U.K. non-conforming assets and CMBS.”
This week, secondary spreads for U.K. prime high quality ‘AAA’ continued to tighten and traded at 130-135 basis points. The fundamentally top performing sectors, Dutch and Italian prime triple-A’s, are currently trading at levels around 125-130 basis points. For Dutch paper, however, redemption/call risk is now fully priced in, said analysts, now that Fortis and ABN Amro did not call as expected.
“Despite the improvement in market technicals and liquidity on ABS markets, we note that from a fundamental point of view, only a few sectors are experiencing a recovery already,” explained analysts. “We are close to reaching the bottom, while real improvements in fundamentals seem to be far away. For example, the unemployment situation remains a realistic threat for future European consumer credit performance and as such for ABS”
Another example the analysts cite is the European housing market. Latest data by the Halifax house price index shows that U.K. house prices rose more than expected for the third consecutive time in September by 1.6% mom. On a quarterly basis, house prices in the U.K. therefore also improved for the first time in two years by 2.8%, while yoy U.K. house prices declined further by - 7.4%.
Although the figures may suggest that a bottom in the U.K. in terms of house price depreciation has been reached, Fitch Ratings recently commented that the recent gains in the main U.K. house price indices are only a temporary respite. The agency warned of a false dawn on the U.K. housing market and said that rising unemployment and low wage inflation is yet to be reflected in house prices.
