Bolstered by a rebounding manufactured-housing sector, the Lehman ABS Index posted its strongest half-year of returns versus Treasurys, according to Lehman Brothers researchers. Most of the record performance came in the first quarter, analysts said, as MH ABS stabilized in the wake of the Conseco Finance reorganization. By contrast, in the six-month period ending Dec. 31, 2002, amid a general widening across most sectors, the ABS Index lagged Treasurys by 135 basis points.
While ABS outperformed the MBS and Agency debt markets, by 78 and 68 basis points, respectively, it lagged the CMBS by 35 basis points and the corporate credit market - rebounding from a dismal 2002 - by a whopping 223 basis points.
While all five subsectors of the ABS Index - autos, credit cards, home equity, MH and rate reduction bonds (RRBs) - posted positive returns, MH posted almost double the returns of the next-best performing sector, RRBs. MH accounted for 290 basis points of excess returns versus Treasurys, attributed to carry (option adjusted spread averaged 445 basis points in the first half) and spread stability from investor sponsorship of senior bonds. In the second half of last year, MH underperformed by 1141 basis points.
RRBs, or stranded-cost ABS, returned 169 basis points in the first half, bolstered by its safe-haven status and lack of supply that has led to spread tightening. Of the 169 basis points in returns, 131 were due to swap and spread tightening.
The home equity sector saw a 135 basis point return "from carry due to the relatively wide spreads at the outset of 2003," Lehman noted. Credit card ABS had its second-best single half of performance, with 110 basis points of excess return. Roughly half of the returns were due to spread tightening, "with investors aggressively [bidding] up benchmark paper."
The auto loan sector posted a modest 60 basis points of excess returns, as the sector started the year fairly rich and thus spread tightening has been limited. Additionally, headline-induced widening in certain issuers - Mitsubishi Motor Credit is given as an example - led to name-specific widening.
In aggregate, the ABS Index grew in size to $148 billion from $125 billion at the start of the year. The spike was attributed entirely to the inclusion of 18 new issuers to the index, which occurred in April, rather than the spate of ABS supply seen in the first half of the year. "Most new ABS bonds are not index eligible," Lehman explains, as "inclusion rules prohibit floating-rate securities and bonds with average lives under one year."