The government’s move to change the index that student FFELP loan are tied to should have a slightly positive impact on related ABS, according to Moody’s Investors Service.
Beginning on April 1, the underlying index for FFELP loans will switch to one-month Libor from three month financial commercial paper (CP). In Moody’s view, this change will moderately cut basis risk for deals backed by FFELP loans because they tend to be priced against Libor, although at a three-month tenor.
“There are fewer sources of potential volatility between the two tenors of one index (three-months versus one-month) than between two different indices (Libor vs. CP),” the agency said.
The graph below shows how the spread between one-month Libor and three-month CP is more volatile than that between the two Libor tenors.
Moody’s pointed out, however, that the change should have no impact on the average basis spread, since from 2000 to 2011 the average spread between three-month Libor and three-month CP was 0.08%, not far from the 0.11% average spread between three-month and one-month Libor.