The recent prime auto ABS spread movements and new-issue pricing show that ABS investor demand for the product might be somewhat uneven, according to a Wells Fargo report released this afternoon.
The benchmark issuers and very short average-life bonds along with some subordinated bonds, analysts said, have had better demand in recent weeks.
The considerable new-issue volume this week should offer added evidence of the degree of demand for auto ABS, Wells Fargo analysts added. For a list of auto securitizations in the market, please see this link.
The demand for the 'AAA' rated Class A3 and A4 bonds from non-benchmark firms, which comprised 37%–47% of recent deals, saw weaker demand versus the A1 and A2 classes, Wells Fargo analysts stated. Meanwhile, the spreads on the Class A1 and A2 bonds tightened, they said, while the Class A3 and A4 bonds widened by up to five basis points.
The ABS analysts also said that the spread curve from one-year to three-years for 'AAA' prime auto ABS, at 25 basis points to 30 basis points, has not been this steep since early 2010. this was the period when the market was still recovering from the dislocations connected to the recession and credit crunch.
At least some of the wider spread differential can be because of the flight to quality and liquidity triggered by the European debt crisis, analysts stated in the report.
Some buyers who manage shorter-duration portfolios have been telling Wells Fargo analysts that the supply of new bonds that are inside two years has been limited. Becuase of this, they have been expanding their investment alternatives to include short auto ABS, analysts explained.
The incremental demand might not easily move further out the yield curve, they said, even with the wider spreads in the Class A3 and A4 bonds. This is because of the short-duration mandate.
"We believe that there may be good relative value opportunities in these parts of the AAA capital stack," analysts wrote.