The spread widening that the asset-backed markets have seen over the last few months looks to be over, according to market pros, as the anticipated flood of issuance in the U.S. and European markets fails to materialize.

"Swap spreads have been tightening and that seems to have taken bond spreads in as well, but in some markets, like the sterling market, it is also because there is a lack of paper around," said one trader. "I wouldn't say that there is a lot of trading activity but the tone of the market is generally positive."

Traders and analysts agreed that much of the recent widening was due to anticipation of bumper issuance, with the market wondering if there is enough demand to soak up the flood.

However, European issuance so far in September has been heavy but not spectacular and there has certainly been no indication that the market could soon reach saturation point, particularly as investors who have sat on their hands over the summer begin to spend again and new investors hit the ABS market for the first time.

"Many investors have money coming in all the time and as they've bought little over the summer they will have to spend that cash. Plus, there is a lot of anecdotal evidence that recent deals have been attracting around 20% of new investors. Taken together that is likely to help the market absorb all the paper that is coming," said one analyst.

"People are realizing that worries about Y2K are overdone I wouldn't be surprised if there are quite a few deals in November and that is going to offer some support to spreads," added another trader.

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