PHOENIX - With ABS spreads grinding ever tighter and investors showing no signs of getting up from the table, one trader gave his opinion of where investors can satisfy their cravings during a preconference workshop at Information Management Network ABS West 2005 conference held here last week.
Using U.S. Treasurys as a benchmark, spread levels in the credit card and auto sectors are currently just five to 10 basis points away from those witnessed in 1998, said George Smith, ABS trader at HSBC Securities. In this yield-starved environment, investors can't afford to be too finicky. "Any spread widening should be viewed as a buy opportunity," Smith said. "As a defensive position, stay with liquid and double-A [rated] products."
Sector by sector, Smith noted a good value in mezzanine home equity paper, and recommended spread-hungry investors in credit cards and autos look for less liquid and subprime names. In the student loan sector, investors should buy the longer-dated classes for a spread pick up, Smith added.
Broadly speaking, Smith expects primary issuance volume for 2005 to be flat to slightly down as home price appreciation slows and the economy continues growing at a slower rate. However, the decline in home equity volume should be offset somewhat by an increase in credit card and auto issuance, he said. Roughly $70 billion in outstanding credit card ABS is on track to reach maturity. Depending upon how much of that $70 billion is resecuritized, the sector could see a significant boost in volumes in the coming year.
Meanwhile, new issuance in the auto sector will be driven by how successful the Big Three auto makers are in accessing the unsecured debt market, Smith said, which has yet to be seen.
During the session, questions were raised about how a slowdown in home-price appreciation could impact the credit environment, particularly as it relates to homeowners who have been tapping into the equity on their homes as a means to pay down other debt and improve their credit. "As home price appreciation slows down, credit card debt will presumably increase," HSBC's Smith said. "This could translate into higher delinquencies and defaults on HELOCs and credit cards. However, this is not necessarily imminent."
Also of concern was the proliferation of IO loans, and some of the aggressive marketing techniques originators are using to attract borrowers. IO loans are fueling growth in the home equity sector, and [low] monthly payments are how originators are pitching their product," Smith also said.
Despite these unsettling trends, investors appear relatively sanguine. As testament, Smith noted that triple-A floaters have been the most difficult bonds to sell during the best six weeks. However, the market is likely to balk at the slightest whiff of trouble. "With the first sign of weakening consumer credit, tiering between nonprime and prime [issuers] will widen out again," HSBC's Smith added.
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