The escalating situation between North Korea and South Korea coupled with lingering concerns about whether Europe can pull itself out of its slump sent yields tumbling further this morning.
This lingering malaise surrounding European sovereign debt continues to constrain an improvement in European ABS pricing.
"Indeed, the current proposition of senior European RMBS trading inside senior unsecured paper, while an acceptable short term aberration, is unlikely to prove sustainable and could point to further spread widening," said Deutsche Bank analysts.
The pricing environment for U.S. ABS has also weakened. Last week, Navistar priced its NAVOT 2010-A deal at wider-than-expected spread levels. The deal's shortest tranche, a 'P1'-rated 0.31-year note issue priced at spread guidance of seven basis points over Libor. but the longer-dated tranches went wider at 60 basis points over Eurodollar swap futures, compared with initial guidance of 50 basis points, while its $217.9 million of 'AAA'-rated 1.89-year notes were sold at a wider 85 basis points over Eurodollar swap futures, versus guidance of 70 basis points, according to a Reuters report..
Societe Generale analysts said that an already jittery marketplace took another significant leg lower.
"The scramble for defensive products saw Bund yields fall further as equities took a nosedive (-3%) and iTraxx corporate protection costs rose sharply," analsyts said. "Core sovereign bond yields are now falling at around the same pace that corporate non-financial yields are rising; the latter actually seem to be holding up relatively well in the face of such pressure to de-risk. This is leaving corporate bond yields still hovering at historical lows!"
The iBoxx non-financial sector yields 3.44% currently (low 3.3%, high 7.2%) whereas the financial sector yields 4.6% (low 3.2%, high 9.9%). The five-year Bund yielded less than 1.5% (iBoxx 5-year sovereign yield is approximately 2.4%) and equities are toxic at present. Spreads on the iBoxx corporate index have risen by 71bp in the past three weeks.