A funny thing happened to triple-A home equity spreads last week - they widened significantly and some spreads on two-year maturities stayed in double-digit territory. A couple of those highly rated tranches on home equity deals came in at eight basis points over the one-month Libor, one market observer said.
Case in point: the Residential Asset Mortgage Trust 2006-RS4, which came to market via RBS Greenwich Capital, saw its top tranche price at that level, while the two-year piece priced at 11 basis points over the same benchmark.
Such encouraging fluctuations in spreads might be short-lived, said some market players, as investors confront a cluster of issues that could keep pricing at their overall tight levels. The capital markets generally expect the Federal Reserve to raise the overnight lending rate when it meets this Wednesday and Thursday. Taken together with fears of inflation and slower economic growth, market professionals say they expect a challenging environment for the next several weeks.
"All this issuance at quarter's end is making for a challenging environment to price at optimistic levels," one trader said. He added: "It will be the third week in July before we can get good price discovery."
At press time, traders and analysts said that about $20 billion in U.S. primary ABS deals were in play for the week. By Thursday afternoon, almost $8 billion had priced. Many issuers appeared to be racing to get deals done before July 1, when Standard & Poor's new LEVELs credit enhancement criteria on certain home equity loan ABS deals takes effect.
"It's been such as push to get [deals done]," one trader said. "The deal supply will dry up as interest rates go up," predicted a market professional. As much as investors want spreads to widen, a wave of CDOs issuance could also keep them thin. This will happen even if spreads are pushed out slightly leading up to the Federal Open Markets Committee meeting.
In other ABS activity, GE Business Loan Trust came to market with a $624 million deal that priced at 20 basis points over the one-month Libor. An interest-only portion of the deal offered investors 6.135%. Bear Stearns ushered the $456 million SACO I Trust deal to market. The most senior piece, with a 1.23-year average life, priced at 13 basis points over the one-month Libor, while the 3.5-year tranche priced at 250 basis points over the same benchmark.
The student loan sector also made a strong showing for the week. Wachovia Student Loan Trust came to market with a $1.6 billion deal, via Wachovia Securities. The one-year tranche priced at two basis points under the one-month Libor, while the double-A-rated, 11.7-year piece came in at 24 basis points over the same benchmark. Also, Student Loan Corp. priced a $2.25 billion transaction backed by FFELP loans.
Ford Credit Floorplan Master Owner Trust came to market with a couple of deals that totaled $3.75 billion, via Lehman Brothers, ABN Amro and Deutsche Bank Securities. The triple-A-rated 2.96-year piece came in at 18 basis points over the one-month Libor, while a single-A-rated, 4.96-year tranche came in at 55 basis points over the benchmark.
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