Last week was the quietest it has been in a while as single one-off student loan offering was the only deal to price by press time. New issuance shriveled and died as the market waited for an interest rate hike and the quarter to end.
The Federal Reserve rate hike, once its inevitability was confirmed, rested the trepidation that so arrested the market in the weeks before it was announced. Most ABS investors described feeling able to walk off the sidelines to take advantage of spreads again.
Also, despite a resolute lack of activity in the new issuance market, as most were waiting for next quarter volumes, some loose-end trading and tire kicking occurred last week in the secondary market.
Both swaps and perked-up secondary flow was taken by market watchers as a sign the asset-backed market looked to benefit from the recent Fed action.
"For the first time in awhile, we saw some good two-way flow," said one trader. "We saw a couple of customer bid lists, but we also saw some secondary buying. We had customers coming in asking about certain kinds of paper, and then we had some coming in looking to sell paper."
The source said the trading was not specific to one asset class, but that it was almost exclusive to fixed-rate paper with the exception of one floating list. This continues a trend, he said, where most buying customers have sought only fixed-rate ABS.
This is contrary to what is usually considered a smart rate play, where if one thinks rates are going to be rising, something that resets on a monthly or a quarterly basis can protect against rising rates. The lack of a market for floaters though, may be due to the fact that overseas investors have stopped buying.
"Floaters typically get good sponsorship from the European accounts," he said. "There simply hasn't been much buying from Europe."
Spreads: To Tighten Or Not To Tighten
Meanwhile, there was a bit of a difference in opinion in which way spreads were going last week, but there was somewhat of a consensus on which way they would head going forward. The prediction is for spreads to ratchet tighter as the buyside awakens hungry, even as supply is estimated to hit record levels.
Swap spreads had widened generally with asset-backeds until the Fed's announcement mid-week. Following the announcement, swaps tightened one or two basis points across all maturities. ABS spreads did not budge however.
Utilities Look To Spark
And separately, Boston Edison and Pennsylvania Power & Light seem to be the frontrunners in the foot race to the next stranded cost deal.
But the Securities & Exchange Commission may be the boot that trips them up on the way to their launches previously scheduled for the end of July. A market source said both deals were hung up waiting to jump through regulatory hoops and garner final approvals.
The delay may have to do with the glut of supply some have estimated is sitting silently behind the dam. It's possible there's a bottleneck at the regulatory agency, sources said.
- SK
