Ending the tightening and healthy tones that carried the market across Jan. 1, spread volatility reared last week as swaps moved out and Treasurys dropped - all on the cusp of the Arizona gatherings, which, traditionally, render the asset-backed market lifeless.

"It's been a very fascinating few days," said Jeff Salmon, of Barclays Capital. "When spreads move out one or two points, you yawn. We're talking 22 to 36 spread widening. Holy-moly."

The shifts in spreads were, theoretically, the result of shifting swap spreads and Treasurys rates.

Swaps widened out substantially last week, which put significant pressure on the fixed-rate spread market.

Also, as Federal Reserve effectively announced they would curtail supply in the Treasury market, yields dropped.

"And of course you're seeing this dramatic inversion in the Treasury rate, which has been a big news story, the inversion of the curve," Salmon said. "So that too has added to this fueling, if you would. Once you see these numbers, you're going to see spreads move out."

In one day the five-year Treasury rate dropped to 6.55% from 6.66%, an 11-basis-point change.

"When you see that dramatic of a shift, it's hard for asset-backeds to re-adjust or maintain a one-to-one spread relationship with the Treasurys," Salmon said. "So that too is having a dramatic impact."

Salmon cited 6.27-year Citibank MT 99-5A paper (see p.4, Bellwether), "which is as benchmark as they come," he said. "That's out 32 basis points from [the week before]. So it's a substantial widening all the way through."

Interestingly, last week's widening was independent of supply, which was light. Under normal conditions, that would tend to move spreads in.

Last week's events were external to the asset-backed market, Salmon noted, "much like the Russian Crisis was in the fall of 1998."

Hypothetically, if managers are forced to sell positions in last week's conditions, Salmon said, they will likely sell floating rate bonds, which have only been pushed one-to-two basis points wider, because theoretically, in a rising interest rate environment, there would be demand for floating rate paper.

So players would likely liquidate their floating rate product so as not to take as substantial a hit, Salmon said.

If people are selling out floating rate paper bought at or near par, they make take a tiny hit given the price differential. But on a fixed rate product, if they were forced to sell, given these new numbers, they might take a much larger hit.

"The long and the short of it is, if we do start to see people look to move out of floating rate positions, because they're forced to raise cash for liquidity, you might also see additional pressure on floating rate product right now as time progresses," Salmon said. "That's purely hypothetical, if you started to see that happen."

Sallie Mae Prices

In the mist of all the spread volatility last week, the ABS market saw its largest issuance of the year.

Sallie Mae priced a $2 billion student loan-backed transaction, bumping student loans up to $3.4 billion, year-to-date issuance, a whopping $1.4 billion more than the runner up sector, auto-loans.

The Sallie Mae transaction, led by Goldman, Sachs & Co., was structured in two parts plus $71.7 million in certificates. A 2.55-year, $1.2 billion A-1 class priced at 9 basis points over the three-month Libor. A 7.09-year, A-2 class priced at 18 points over the same bench.

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