26 January 2017 by Ben Hayward
The headlines so far this year have been dominated by politics, and the potential for market volatility driven by the odd Presidential tweet, realignment of national relationships between the US, Russia, China, the UK, the EU, and the likelihood of further electoral uncertainty. While the ABS market has not been ignoring these issues, it has been more focussed on the level of activity so far this year.
Primary market issuance has been extremely low: 2017 to date has seen 3 deals price – a small (€156mm) repackaging of a vintage Dutch non-prime deal and a rare French RMBS deal, but the majority of the supply was a €2bn Dutch prime deal from Obvion from which only the AAA notes were publicly sold – slim pickings indeed. In comparison, €4.8bn of new issuance priced in January last year.
The secondary market has also been quiet. We can measure this by the amount of bonds that are sold via the BWIC (Bids Wanted in Competition) method – essentially a public auction. So far this year the total volume sums to a somewhat underwhelming €464mm.
Looking forward, the pipeline is looking relatively bare: there are a few CLOs currently marketing, and we expect there will be some more deals in February; however this is unlikely to be big enough to offset the slow start so far this year. This has clearly created a strong technical wave of support for European ABS prices that has been matched on the demand side, as has been seen in other markets, by the notably positive swing in investor risk sentiment. In addition to investor cash being put to work, as typically happens in an environment like this, we have to compete with bank trading desks for product, and it certainly feels as if there is currently an expansion of bank trading books given the positive sentiment as they look to position more bonds to be able to sell onto their client base.
While an obvious by-product of rising prices is less credit spread, the gap in spreads between ABS and corporate bonds still looks healthy across the board. As investors in the more traditional bond markets become increasingly concerned about finding yield, and in addition experience greater duration-led volatility reflecting increased inflation concerns, the potential for further price gains in ABS looks healthy. We are currently measuring the extra credit spread in ABS vs corporate bonds at the single A level as being around 150bps.
So while we would like to see more product come to market for our PMs to get their teeth into, the strong performance of our current holdings have been a pleasant distraction.
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