A short war in Iraq could push ABS spreads wider, but as was the case in 1991, it would likely have little impact on the market in the long term, says Merrill Lynch managing director Dan Castro.
The 1991 Persian Gulf War was the last time the U.S. was involved in a major war while the ABS market was in full bloom. While the U.S. was engaged in a war in Afghanistan beginning late in October of last year, it did not have the same impact on the market as a major war in the Middle East would. Recently, the Pentagon announced plans for a large military buildup around Iraq, including the dispatch of two, and possibly three, aircraft carriers.
"Whenever there is uncertainty people flee to safety as most see ABS safer than anything else in the bond market," Castro said. "ABS did better than corporates or any other fixed-income a decade ago. Generally speaking people sit on their hands and we see liquidity dry up and spreads move wider."
Castro also said there will be some slight pressure on spreads in the near term as there is likely to be some descent issuance in January, pointing out that issuance did not slow this December the way it normally does. The credit picture is still fairly weak and people are still worried about that. Other than the very liquid names, there will be some pressure for spreads to move slightly wider. Merrill forecasts home equity would be making up the largest sector in 2003, at $150 billion. This would be followed by autos at $90 billion and credit cards at $75 billion. On the CDO side, Merrill is predicting $165 billion of cash and synthetic volume. Merrill's full forecast is available on p. 6.