The potential for a Treasury reduction and subsequent inverse of the Treasury curve created a stir in the credit markets earlier this year. The return of the curve to normal - hence the steepening of the curve - should not have a substantial impact on the asset-backed securities market, analysts said.
"In some ways, it's almost a non-issue for the ABS market, as most of the movement in the Treasury market is happening further out in the curve, in the 10-year and 30-year sectors, where there isn't a whole lot of asset-backed product," said Alex Roever, analyst at Banc One Capital Markets.
Further, since first quarter 2000, most ABS asset classes have gradually moved over to swaps as a benchmark for pricing, which lessens the exposure of ABS to shifts in the Treasury market.
"To the extent that the Treasury backs up, there's no guarantee that it's necessarily going to affect where the swaps curve is," Roever said.
However, according to Larry Rascio, a vice president in the derivative products group at Bear Stearns, as the Treasury curve steepens, swap spreads are likely to move in.
Rascio noted that when the Treasury curve was most inverted, there was a positive correlation between Treasury curve and swaps spreads.
"Given the current market scenario, it is reasonable to expect the Treasury curve to revert back to the shape and behavior we saw earlier this year," he explained. "If this occurs, I would expect the positively correlated movements between Treasury yields and swap spreads to turn negative, where a steepening Treasury curve would put tightening pressure on swap spreads, especially in the longer end."
The effects of the latest Treasury curve reversal has not only affected swaps, it has also made investors in other credit products more willing to hold assets on a leveraged basis, Rascio said. This is because as the Treasury curve steepens, the spreads between the yields on those investor's assets and their financing cost increases.
"Lately, USD swaps have been the reactors rather than the drivers during the recent bout of curve gyrations," he added.
Movement in swaps has become more and more relevant to the ABS market.
Most recently, home-equities have made the jump, with the majority of the September deals benching off swaps in the fixed-rate classes.
Just last week Credit Suisse First Boston revised its Weekly Spread Matrix to reflect spread versus swaps, as opposed to spreads versus Treasurys for home-equities, as well as other asset classes.
Interestingly, with regard to the Federal Open Market Committee - which decides where interest rates go - market conditions are nearly opposite from what they were going into the February ABS conferences, when the Fed was raising rates and threatening to buy back its debt.
Next week, the market gathers once again, this time in the Bahamas, for Information Management Network's ABS East.
