A report from Wells Fargo Securities highlighted the importance for investors to protect themselves from the volatile interest rate movements the financial market has seen recently.
According to analysts, some allocation of floating-rate ABS can mitigate the effect of rising interest rates on a portfolio, specifically they emphasized the protection from FFELP SLABS. Analysts recommended that investors that can withstand the possibility of further rating uncertainty should look into the sector.
The downward interest rate trend in the last five years is still there, analysts stated. However, the market might be finally reaching the bottom.
"While interest rates are currently quite low, we have seen several episodes of 100-basis point reversals in short periods of time," analysts stated. They think that investors should position their portfolios for the probability of similar market movements based on better economic growth or if permanent solutions can be found to the different risks in the financial system.
In their report, analysts presented a framework for examining returns in a 12-month period to bonds from various FFELP SLABS segments. They view FFELP SLABS as having properties that make them attractive in the current economic and interest rate environment. Generallly, analysts like FFELP ABS issued from the 2010–2012 vintages given their straightforward capital structures.
These transactions, according to analysts, also may provide higher coupons that offerbetter carry. In this scenario, they suggested bonds with longer average lives, benchmarks to three-month Libor, and state-agency sponsors to pick up incremental yield.
Spread movements over the past few weeks have pushed credit cards, prime autos and equipment into “rich” territory based on our technical spread model. Subprime autos and student loans still seem to offer better value, in our view.