The financial markets, including structured products market, seem to be heading towards another period of caution. As laid out in Securitization Weekly Overview, 24 February 2012, caution is warranted given the potential for higher oil prices (relatively strong economy & geopolitical risk due to tensions with Iran over that country’s nuclear policies), the possibility that the positive sentiment over recent developments in the Greek debt crisis begins to fade, and fiscal tightening and election year politics limit further progress in the US economy. These factors, combined with strong year-to-date returns, have lead to a recommendation of scaling back exposure to securitized products and retaining exposure to only the highest-quality segments. The higher quality segments would include virtually all ABS, leading us to remain constructive towards most ABS. So far this year, new issue volume is up 32% YOY with $25 billion issued across all ABS sectors. The auto sector continues to dominate volume with deals in the prime & sub-prime auto loan sectors and dealer floorplan sector. Secondary volumes remain relatively light, leaving spreads unchanged on a WOW basis. The auto sector has benefited from relatively strong credit performance (see following section), permitting issuers to lower required credit enhancement levels. All else being equal, we believe delinquencies and defaults will be higher for loans originated in 2012, as the willingness to lend and borrower has increased for lenders and borrowers. As a result, we would expect the level of credit enhancement on new deals to be fairly consistent with the levels seen on late 2011 and early 2012 deals. Nevertheless, the level of gas prices is worth watching, as higher prices tend to have a negative impact on vehicle valuations. Recent economic strength (possibly offset by down-side risk to the economy due to fiscal tightening) and concerns regarding Iran could send gas prices higher. The ratings on the notes issued by Citibank Credit Card Issuance Trust (CCCIT) were placed on review for possible downgrade by Moody’s. Separately, the ratings on the notes issued by Capital One Multi-Asset Execution Trust (COMET) were affirmed by Moody’s. The rating actions on CCCIT resulted in some discussions but little, if any, trading activity or spread movement. Meanwhile, longer dated notes issued by COMET were tighter by a few bps. Trading activity and spread levels in the credit card ABS market are increasingly influenced by the rapid decline in the size of the market and significan
Bank of America Merrill Lynch analysts view the financial markets such as the structured products market as seemng to head toward another period of caution.
They reiterated their previous comments that this caution is warranted considering the potential for higher oil prices. Analysts cited the comparatively strong economy and geopolitical risk resulting from tensions with Iran over the country’s nuclear policies. The potential for a positive market sentiment regarding recent developments in the Greek debt crisis are also starting to go away, and fiscal tightening and election year politics are hindering further U.S. economic progress, analysts stated.
These several factors, they said, along with strong year-to-date returns, have lead analysts to suggest that investors scale back exposure to securitized products and retain exposure to only the highest-quality segments. The higher-quality segments would include almost all ABS, they said, which has led them to stay constructive on most ABS sectors.
Analysts added that thus far in 2012, new-issue volume has increased 32% year-over-year with $25 billion issued across all ABS segments. The auto sector is still dominating volume with transactions in the prime and subprime auto loan sectors and dealer floorplan sector.
Meanwhile, they said that secondary volumes are still comparatively light, which leaves spreads unchanged on a week-over-week basis.
The credit and supply trends in autos and credit cards, aside from the relatively strong liquidity of both asset classes, should be supportive of spreads, and, in turn, buyer demand for safe-haven products. Analysts are also still constructive on certain senior FFELP ABS with the possiblity for headline news seems to be abating and spreads in the sector have lagged other high-quality assets.
The current comparatively low risk-free yields should still benefit demand for esoteric ABS. The firm's view is still benign in terms of subordinated FFELP ABS as well as senior and subordinated notes issued by vehicles with auction rate notes, as potential ratings volatility might go against the Federal government’s ultimate guaranty.
Analysts remain less constructive on the private student loan ABS sector given that headline risk is still limiting the benefits of the sector's stabilizing credit performance.