The ABS/CMBS secondary markets moved hot and heavy last week, according to traders, while mortgages suffered. Amid semi-decent economic news, one trader called the action a "reverse flight to quality" trend, as structured finance triple-As, similarly to Treasurys, may experience a slight sell-off.
Unlike Treasurys, however, there has been little-to-no cheapening in the ABS secondary to date, though roughly $2 billion traded hands on Wednesday bringing the weekly total near $4 billion, a source said adding, that spreads will likely widen if the sell off continues. Interestingly, however, it appears these secondary sellers are the non-traditional buyers of ABS that crossed over last year to park their cash in safety.
"The buyers are the traditional buyers of ABS and CMBS," the trader said. "There's more of a theme in the sellers. These are re-allocation trades." This puts subordinates in a favorable situation, as crossover buying, especially from overseas accounts, is typically focused on triple-A paper.
As with the sell off in Treasurys, the money is moving out of triple-As and back into the equities and/or corporate debt markets. The recent backup in interest rates and strength in the Dow Jones Industrial Average may have signaled the long-awaited economic rebound. "The end of the current cycle came in mid-June," noted Banc One Capital Markets researcher Glenn Schultz. "Ten-year Treasuries bottomed out at 3.11%, leading to the current sell off, felt at the long-end of the curve."
"Guys who had been long in duration, started getting short in duration," Schultz added.
Triple-A rated home equity supply is currently trading "at extreme rich levels," according to Schultz, who recently changed his recommendation on fixed-rate HELs. "The triple-A fixed rate HEL sector, we believe, offers little to no upside in spread performance given current valuations." He said. "They have more room to widen than to tighten."
Currently, triple-A ABS spreads are at all time lows. Top-tier auto loan paper, boosted by a relative lack of supply, trade in the single-digits to swaps and credit card ABS has continued to grind tighter, as evidenced by the recent Bank One Issuance Trust 2003-A7 five-year trade, which priced to yield seven basis points over swaps.