The European primary market remains practically at a halt, with limited deal flow seen since the market reopened after the August break. It is unclear if issuers will brave the market in October, but some market players are hoping that the encouraging signs of life via secondary flow could bring in a wave of new deals.
I'm officially bearish, said one secondary market trader at a large investment bank. "But I'm one of the few. In the secondary market, we've seen a tightening of basis points, up to 20 basis points, and there are still those looking to buy now.
They've missed the boat on some good deals, but investors are coming back," he added. Another secondary trader noted that he was bullish, saying that at his investment bank the trading difference between the highs of October and the lows of September was likely going to be the largest the bank had ever seen.
"Maybe the market is moving too fast, with too much," he said. "Even the sellers are happy to buy and the investors are happy to sell, so the market might just stabilize sooner than later.
Analysts at Deutsche Bank appeared to agree that the worst seemed to be over. "The secondary market tone improved appreciably over the past week, with greater flows and tighter spreads seen across most traded asset classes, they said, adding that the flows for now look to be limited to the seniormost vanilla product such as Dutch and U.K. prime RMBS, "which have seen spreads tighten to around 30-35 basis points from near 50 basis points earlier in September.
"However, the primary market remains in gridlock for now," they added, "with deal flow only just emerging. Indeed, a primary trader at a Paris-based investment bank added that he was free to speak of the market at length, because he has, "a lot of time on his hands." The source added that he felt the primary market was not going to see more action until a syndicate brought a $1 billion or $2 billion deal to the table. Bankers are saying they have the cash, that the investments are there, but I think they're saying that just to keep their jobs right now," he said. I heard one saying the U.K. and Dutch RMBS will go back to 10 basis points, and that's just plain bollocks"
Last Monday, Societe Generale launched its "SGAM Invest Bonds Recovery 2007," in an attempt to create opportunity from the chaos of late. The fund aims to "allow investors to take advantage of the opportunities that have arisen in the wake of the liquidity crisis in credit markets; by focusing on the attractive pricing levels of securities, the fund seeks to capture the liquidity premium," according to the bank, in a statement. The minimum investment is 1 million ($1.4 million). An analyst at the bank added that he believed relatively illiquid products, such as SME of CLOs, were not seeing any trading at the moment, with little chance of an increase in the short term.
Spreads have started to narrow, with more interest on both the buy side and sell side, especially on the more liquid paper," he said. "The market has not totally recovered, it's still in shock; however, with more interest on both sides, surely things will pick up.
Despite the optimistic talk, however, another trader added that it still "wasn't yet time to serve the champagne" in the European secondary ABS market. I can think of 10 bonds just like that off the top of my head that you couldn't get even a bid for, he said.
Analysts at Dresdner Kleinwort agreed that while most investment banks are seeing secondary action, most of the energy is for dealing with questions for investors, month-end revaluations, and street-side trading. Traders said that the rapid spread-tightening that took hold on secondary trades has left some buyers expecting to continue to pick up paper at levels that would now be considered wide of the market. Inversely on the sellside, the tightening phenomenon has some traders only willing to sell paper at expensive levels.
The problem is that having tightened in at some speed at the end of last week, offers are at unrealistically tight levels, while bids are still back at what are now unrealistically wide levels," explained traders at Dresdner. "The upshot of this is that bid-offer spreads are gaping -- five basis points or more in Dutch and U.K. names, and up to 25 in Spanish paper meaning that little can trade.
For the long-term stability of the market, this might not be a bad thing, as it will allow accounts a bit of space to get used to these new levels, they added.
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