January: the Month of ABS-tinence
January is traditionally the month of no fun. From Dry January to Veganuary, the theme is usually based on giving something up.
European ABS seems to have taken things particularly seriously this year, perhaps even more so than expected, with the primary consumer ABS market having produced the sum total of zero deals.
There is always someone who falls off the bandwagon early, which in this case was Credit Suisse Asset Management with its Cadogan 13 CLO.
Still, across consumer securitisations (mortgages, credit cards, autos, student loans etc.) and corporate securitisations (commercial mortgages and leveraged loans) the total volume was a trifling €509m from that one deal.
This is no surprise, as we highlighted in our outlook for 2019, and does lend an edge of technical support to the ABS market.
The secondary market has been more active, with our typical measure of liquidity and volumes being the BWIC (Bids Wanted In Competition) flow data. Last year, when the ABS market finally saw a bit of the same volatility that was affecting other markets, and as bank trading desks backed off from providing liquidity, BWICs came into their own. ABS investors traded around €2bn per month in November and December, materially above the average for January to October in 2018, which was just €1.3bn.
BWIC flows slowed markedly as January progressed with weekly volume peaking around €700m in the second week and roughly halving week-on-week over the next two, meaning total volume had only made it to €1.4bn by January 25. Investors are clearly not motivated to reduce their current holdings, while we have also seen bank traders willing to increase risk and take up some more of the trading slack.
This reduction in selling is partly driven by the lack of new issuance – why sell if you know it will be hard to replace? – but while spreads have started to tighten from the wides we saw amid the volatility of November and December, they have not retraced anywhere near as much as corporate bonds and leveraged loans.
That lag in performance can also be partly attributed to the lack of primary issuance. Investors could do with a sense of direction from seeing subscriptions levels on new deals, and where benchmark-type trades are being priced.
So while spreads are still cheap to recent years, we feel that getting a trade into the primary market would give the market direction and may reduce the relative value opportunity rather quickly.