In a Wells Fargo report released yesterday afternoon, analysts said to take credit risk in consumer asset-backeds for incremental yield.
To make their point, analysts looked at how tight the spreads are on prime auto ABS. They said that the spread levels in the sector are tight enough that issuer USAA has offered its first new deal called USAOT 2012-1 since February 2010.
Wells Fargo analysts added that it took five years for 'AAA' spreads in some segments to return to the pre-crisis levels last seen in mid-2007. Additionally, the recent memory of wider spreads appears to be weighing on the market’s relative value view, analysts noted.
The firm's relative value outlook is still unchanged from earlier in 2012, even given the tighter spreads and as the consumer ABS market still functions as a safe haven for many buyers.
They think that benchmark auto and credit card spreads will probably stay low. Strong investor demand and new-issue volume growth has added liquidity while improved transparency has contributed to the positive momentum to the sectors, they said.
Analysts believe that subordinated bonds in prime and subprime auto deals are still providing good relative value. But, the small size of these tranches and strong demand for them has made it hard to purchase them in meaningful size, analysts acknowledged.
They said that the senior bonds from FFELP student loans, auto leases and floor-plan ABS still offer value. This is based on alternatives in consumer asset-backeds. Other segments including private student loans and timeshares provide even wider spreads for buyers that can venture into sectors that might have somewhat less liquidity, analysts explained.
They also sugggested that the monitoring of longer-run spread trends might give a better perspective on value. They reviewed the changes in spreads since March 2011, which was prior to the broader spread rise seen in 2H11. Based on this period, certain segments of the market, including FFELP student loans and subprime autos, might measure up more favorably versus spread changes based on a year-end date, analysts said.