The improving liquidity in the broader financial markets did not stem the widening in spreads on asset-backed securities last week, according to research published by J.P. Morgan.
“It is possible that the better liquidity in ABS relative to other structured product sectors allows investors to more easily liquidate ABS assets to satisfy redemption requests, which puts further pressure on spreads,” Ed Reardon and Kaustub Samant wrote in the report.
Spreads on three-year, ‘AAA’-rated credit card ABS widened by 4 basis points, and widening was much more pronounced in the subordinate classes, the analysts noted. Spreads on prime auto loan, equipment lease and government guaranteed student loans also widened by 5 basis points each during the week.
The softness in the market has reversed the flattening of the credit curve that had occurred since the start of the year.
Before the Federal Reserve began to signal it would slow its purchase of bonds, the spread differential between ‘AAA’-rated and ‘BBB’-rated credit cards had narrowed to 43 basis points from 55 basis points at the start of the year. Currently, the spread differential between the two classes is 65 basis points.
The analysts said they remain “cautious” in the near term, as the July 4th holiday week may further reduce liquidity, but look for broader ABS spreads to move tighter by the end of 2013.
