Relief for fixed-rate product could come in the form of a slowing economy, market watchers say.
For the past few months, asset-backed investors have been keeping a close eye on the shape of the yield curve, with many issuers opting to swap to floating-rate to meet demand, which was anticipating rate hikes by the Federal Reserve Bank.
With the positive employment data that has been seen in the more recent weeks, signs of an economic slowdown are beginning to come out of the woodwork, possibly stopping the interest rate hike that was expected at the next Federal Reserve meeting on June 27, market observers say.
As market conditions look more attractive, many industry experts feel that there couldn't be a better time for issuers to bring fixed-rate transactions to market.
"If a lot of issuers feel that in fact now is the time to do a fixed-rate transaction ... you'll probably see more fixed rate deals get done in the near term as issuers attempt to take advantage of what appears to be a stable interest-rate environment," remarked Jeff Salmon, director of asset-backed research at Barclays Capital.
Said another analyst, "I think it might make people a little more willing to move out of the defensive posture that has characterized a lot of investors who have emphasized floating rate a little more than they might ordinarily," said the source.
The assumption is that as interest rates rise, investors can protect themselves in floating-rate product as coupons rise in tandem.
Going forward, certain sectors will be more affected than others. For example, the asset-backed market may be seeing a sprinkling of fixed-rate transactions coming from various home-equity and auto-backed issuers.
"They're the ones that are probably looking very closely at this market and saying, Hey, now is the time to bring some deals to market,'" Salmon said.
However, one asset-backed analyst noted that many credit-card banks are naturally inclined to issued floating-rate securities, so very little change will be visible in the credit-card sector.
Though there will be changes in the near term, they won't be earth shattering, as the market has already priced in the possibility that interest rates may remain at their current levels, one trader noted.
"The levels that you observe in the market are already taken into account, I believe, by folks who feel that the Fed is done raising rates," the source said. "I think if we do have the anticipated inaction by the Fed, that will probably help the market a bit."