The volatile reaction created by the Federal Reserve's QE2 drove demand down in the consumer ABS sector, Wells Fargo analysts said.
It's likely that since these volatile market conditions will linger, investors might opt to close portfolio allocations within the sector a bit sooner this year.
"The demand for consumer ABS as we approach yearend, particularly at the triple-A rating level, has fallen off," Wells Fargo analysts said in a securitization research note released today. "Nonetheless, the demand for subordinated bonds remains relatively strong as investors continue to seek higher-yielding assets."
They said that spreads on triple-A consumer ABS increased by about 20 basis points since early September as the plans for further QE2 were announced at the beginning of the week. At the same time, the average spread on triple-B, prime auto ABS have tightened 35 basis points to 180 basis points, they noted.
The desired effects of QE2 will likely be felt by the economy, analysts said. Against the backdrop of more moving interest rate environment, this could mean more volatility in credit spreads as well.
"The housing market remains the primary hindrance to economic growth," analysts stated. "As a result, interest rate movements may be volatile and subject to greater headline risk from economic and political events. This could keep consumer ABS credit spreads more volatile than usual as well."