Displaying an increasingly bearish sentiment on the home equity ABS sector, JPMorgan Securities analysts last week, calling the mix of expected slowing home price appreciation and simultaneously heightened short-term borrowing costs an "indeed ugly" mix, lowered its bias last week to neutral on the asset class.
Risk of default, particularly at the low end of the credit spectrum, has undoubtedly escalated in the market's perception. Spreads in cash triple-B minus home equity ABS have gapped out by 40 basis points on average this quarter, while synthetic market spreads have ballooned by 85 basis points, according to JPMorgan. Analysts anticipate spreads will keep pace with yields and rate hikes initiated by the Federal Open Market Committee.
"Given the magnitude of spread widening already seen, and the possibility of some relief rally in rates and spreads, we think it is too draconian to move to an underweight at this juncture," JPMorgan analysts wrote. "However, we think investors should use any improvement to pare back risk positions. The landscape has quickly and unmistakably changed for the worse. Great caution is warranted."
One saving grace that may help quell the drastic spread widening could be the healthy pipeline of cash and synthetic CDOs full of ABS collateral headed to the market before year-end, according to JPMorgan. Some 30 deals totaling $18 billion are anticipated as issuers, such as E*Trade Global Asset Management Inc., aim to squeeze in deals in the seven weeks remaining in the year.
E*Trade is planning a $300 million CDO backed with a nearly 65% portion of subprime RMBS, about an 80% concentration of RMBS overall and weighted average rating factors of triple-B and triple B-minus. That deal should hit the market in December. Similarly, Hyperion Crystal River Capital Advisors plans to issuing a $391 million deal this month, backed half by CMBS and commercial real estate loans and half by RMBS, including about 27% subprime RMBS.
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