Asset-backed and mortgage credit markets gyrated both up and down during one of the most dizzying weeks for financial markets but there was one thing that left investors hopeful about their sectors: liquidity.
Traders and investors were reluctant to pinpoint the impact on structured product and credit risk transfer bonds this week, with several suggesting that it would be irresponsible to say when market makers were tied up for three days at the industry’s largest conference in Las Vegas. Some at the conference claimed that trading was thin and so not an ideal reflection of how weak sentiment had become for structured debt, relative to the blows taken by high yield debt and stocks.
By Friday, it became clear that ABS and CRT markets were trading methodically — and sometimes firmly — as the drubbing in stocks and riskier leveraged corporate debt continued.
Credit risk transfer bonds that are among the non-agency market’s most liquid securities traded in modest numbers with dealers continuing to make markets, said one investor. Data from Finra’s TRACE supported his assessment, reflecting trades that pushed spreads 5bps to 40bps wider, depending on the risk and convexity of each bond.
A more than USD 5m STACR 2017-HQA3 B1 from Freddie Mac traded on Friday morning at 109.84, down about 2.5% from its record high of 11 February, according to TRACE. In mezzanine issues, a USD 5m CAS 2019-R07 1M-2 from Freddie Mac traded at 100.09 on Thursday, down just 1% from a 21 February level, TRACE showed. The mezz bond bounced back to 100.21 on Friday (28 February).
“I’m really impressed with the dealers continuing to make markets,” said one investor who concentrates on the lower part of the capital structure. “It shows the depth of the buyer base,” he said.
“I thought CRT would be hit worse, but it has held in there fairly well,” said another CRT buyer. He said he hasn’t traded the bonds.
Harder hit were CLOs, which are closely tied to the health of companies affected by slower growth caused by the spread of the coronavirus, he said.
Late Thursday, Chris Abate, CEO of mortgage REIT Redwood Trust, told analysts on his 4Q19 earnings call that corporate debt would be directly impacted with the markets “gripped with fear”. Commercial real estate debt would follow, and the residential debt that makes up the bulk of Redwood’s business would be less affected, he said.
Indeed, spreads on legacy RMBS were just 5bps–10bps wider on the week, Nomura Securities analysts wrote in a report today. CLOs with junk-bond BB ratings and low-investment grade BBB ratings widened by 100bps and 50bps this week, they wrote. There was limited price transparency in CLOs, they wrote.
In CMBS, price talk suggested that investors were demanding higher yields to support new deals in the market, as reported. An AG Mortgage Investment Trust executive speaking on an earnings call on Friday singled out hotel debt for its particular exposure to the current health crisis.
“The (residential) non-agency market has held in relatively well compared to the significant widening in other products,” Wells Fargo Securities analysts wrote in a weekly wrap. The analysts predicted that investors will increase demand for the most liquid bonds as market uncertainty and defensive posturing grows.
Trading in some ABS showed little correlation with the drubbing taken in corporate-related debt or even riskier mortgages. In addition to the traditional liquidity premium in consumer ABS, one analyst noted the benefit that borrowers can get from lower interest rates, which if measured by benchmark US Treasury 10-year note yields fell a whopping 35bps this week to a record low of 1.12%, one analyst said.
A USD 8m AAA rated AART 2019-1 A3 Ally prime auto ABS traded Friday at a 101.97 price, near the top of its recent range, according to TRACE. While that was up from 100-handle trades earlier in the week and 99-handle trades last week, the bond has range-traded between 99 and 101 for months.
A USD 500,000 AAA rated FCAOT 2018-REV1 A prime auto loan ABS traded at an all-time high this week of 107.25, compared to a trade at 106.211 last week, according to TRACE. The bond has traded hands generally at 103-105 handles in recent months.
But even ABS tied to assets that have drawn scrutiny for their exposure to reduced travel and consumer spending habits eked out gains. In aircraft ABS, where new issues had been swift sellers despite reduced air travel overseas, a USD 4.47m AA rated BBIRD 2016-1 A from Blackbird Capital found a willing buyer Friday at a strong 102.238 price, TRACE shows. The bond has traded a smattering of times at 101 and 102 handles since April, the data show.
And a USD 5m BBB rated DIN 2019-1 A-2-1 DineEquity Applebees whole business ABS traded at 103.055 — the bond’s third 103-handle trade this week. Prior to this week, it had never traded above 103, ranging mostly between 100 and 102, TRACE data show.
by Al Yoon and John Wilen