hman Brothers has shifted its bias for ABS to Neutral from Overweight this week, as spreads have tightened to the point of being over valued, the firm said. Despite what it calls "powerful demand technicals" in the ABS market, Lehman believes that ABS spreads "are close to a spread floor," and sees little upside in the current market, with a few notable exceptions.
In its most recent weekly research, Lehman researcher David Heike notes that fixed-rate prime auto and stranded cost ABS are trading in the low single digits over comparable swaps. Floating-rate credit cards are trading flat to Libor at the front end of the curve and home equity ABS, meanwhile, are at all-time tight spreads.
Lehman's insights:
Cards: New records for subordinate BBBs
Autos: Spreads seem snug
RRBs: Strong investor demand for increasingly scarce RRBs
HELs: Single-As offer a pocket of value in a fully priced sector
MH: Still room to narrow, but reduce overweight
Aircraft: Security selection important amid stronger passenger trends
Lehman's Heike does concede that current strong demand will likely keep spreads tight in the near term, "for most assets the narrow spreads and flat curve provide little protection against any potential interest rate, credit or headline risk that may arise in the future."
Value does remain, however, in certain sectors of the market, primarily subordinates and off-the-run sectors. Lehman cites single-A rated home equity floaters, trading 30 basis points cheap to its historical tight level, as having value. Other floaters in the capital structure are fully valued, Lehman adds.
Fixed-rate home equities, meanwhile, are fully valued. Further, should prepayments slow by as little as 10% CPR, Lehman sees five-year fixed-rate home equity classes extending by as much as two years.
Amid the brouhaha over the manufactured sector lately, now may be the time to cash in some returns and reduce exposure to the sector. "We remain constructive on MH spreads given the improving collateral trends and continued positive macro developments although we advocate a lower overweight following the strong rally over the past couple of months," Lehman recommends.
