The spread differential between triple-B and single-A home-equity ABS was at approximately 18 points last week, well inside the 52-week average of 55 basis points, according to research from Banc One Capital Markets.
Banc One recommends selling triple-Bs for single-As, moving up in credit without giving up too much yield.
"I knew from eyeballing it that it had come in," said John McElravey. "But I was very surprised when I actually ran the numbers to see how much the differential had narrowed."
Perhaps one of the year's most significant stories, spreads on triple-Bs from several ABS classes had been coming in pre-Sept. 11, and have since remained surprisingly firm, due to the ongoing bid from ABS CDOs.
Lately however, credit spreads have been widening for most other sectors, especially at the triple-B level. Home-equity, though, has felt the artificial bid more than other asset classes, because CDOs are generally looking for longer-life, fairly liquid assets, with as much yield as possible, a bid clearly boding well for home-equities.
According to Banc One, triple-B home-equities have come in 43 basis points year to date, while single-As have moved out 10 points.
"It looks like the trend towards tighter triple-B spreads has sort of slowed down or bottomed out," McElravey said. "Some of that is the economy is slowing. It may be starting to widen out a bit."
Working the ratings
In its weekly Structured Credit Products Strategy, Banc of America notes that there is opportunity in CDOs with limited risk/industry exposure, but were nonetheless identified or placed on watch by the rating agencies following Sept. 11.
For example, Fitch placed 67 classes of 26 deals on watch, due to exposure to the various at-risk industries, including aircraft, rental car, lodging and tourism.
In the report, author Lang Gibson writes, "If an investor buys a CDO before its Rating Watch Negative action is reversed by Fitch based on its own analysis of the deal, there could be an immediate profit once the rest of the market learns of Fitch's reversal. Further, for investors with strong views on surviving airlines, there is an opportunity to buy CDOs with large exposures to these airlines, because spreads on these CDOs have most likely widened simply based on their exposure to the airline industry as a whole."