European investors are generally optimistic about securitization market fundamentals, revealed Citigroup's European securitized products investor survey. As a result, a large majority of the investors polled intend to further increase their allocation to Europe.
The bank polled 100 institutional investors, receiving 68 replies to various questions on their investments in securitized products. The buysiders were asked to indicate whether the amounts invested in specific categories - asset type, region, rating, currency and maturity - had strongly increased, increased, remained unchanged, decreased, or strongly decreased in 3Q06. The second section of the Citigroup survey was forward looking, asking investors about their plans for 4Q06, and also their concerns.
According to the survey, few European investors have major concerns. This has been reflected in their spread view and positioning. Around 75% said they expect triple-A spreads to move sideways in the fourth quarter, confirming current resilience. It may bring little respite for market pundits expecting spreads to buckle under the heavy issuance pipeline, but the survey did offer some form of relief with the majority of investors polled also expecting spreads not to move in any tighter. At the triple-B level, most investors expect spreads to move sideways or tighter in the fourth quarter, which Citigroup analysts said, has been reflected in the over-subscription levels seen in the current market.
Among the more prominent concerns expressed by some investors was the deteriorating consumer credit quality that has been reflected in wider credit card ABS spreads in the third quarter - the only sector where demand declined during the quarter, said the Citigroup report. Falling home prices are causing some concern, likely reflected in some demand shifts from subprime and Spanish RMBS.
"Overall, the survey results support our year-end view: spreads look set to move sideways, meaning that below triple-A should remain at or close to their historical lows, and triple-A at or slightly inside January levels, except for credit cards [which were] wider," reported Citigroup analysts.
The survey also found that the use of ABS derivatives is set to rise over the coming months, both in U.S. and European ABS. According to the survey, some 34% of investors have said that they intend to use ABS derivatives in the U.S. and Europe, respectively, in the near future. Most of the activity is still reserved for the primary market, but a third of investors reported greater secondary activity compared to the first half of the year. Forty-seven investors said they remain sidelined because of a lack of liquidity, documentation, wide bid-offer spreads, and little divergence in spreads.
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