Bank woes erase ABS spread tightening

IFR 2476 - 25 Mar 2023 - 31 Mar 2023
2 min read

Investor jitters about the health of the global banking system wiped out the spread tightening that the US asset-backed market had recorded since the end of 2022.

The market reversal in the wake of US bank failures and the acquisition by UBS of Credit Suisse caused Santander, Fannie Mae and Automotive Rentals to suspend their deals. It was difficult to price new paper because of the wild swings in bond yields, bankers, issuers and traders said.

Moreover, many fund managers grew reluctant to hold securitised debt in this volatile environment, market participants said.

"People are still shell-shocked from what has transpired. Macro volatility engenders wider spreads," InspereX senior trader David Petrosinelli said.

The spread widening in the ABS market began after regulators shuttered Silicon Valley Bank and Signature Bank earlier this month.

Not surprisingly lower-rated, riskier ABS sectors posted the most significant spread widening in the week ended March 17, JP Morgan analysts wrote in a research note. Average secondary spreads on three-year Triple B sub-prime auto ABS widened by 60bp to Treasuries plus 300bp, which was inside a wide of 425bp in November, they said.

Even liquid, low-risk ABS sectors were unable to buck the move.

The average secondary spreads on three-year Triple A credit card ABS gapped out by 30bp the week of March 17 from the prior week to 75bp over Treasuries. The widening – which was the biggest since the early days of the Covid pandemic in 2020 – erased the tightening since the start of the year. The spreads were also 5bp wider than those in late 2022, JP Morgan analysts said.

Credit conditions stabilised following the Federal Reserve's expected decision to raise short-term interest rates by 25bp to 4.75%–5.00% on Wednesday. They encouraged issuers such as Ford and Kubota to price deals last week.

However, spreads stayed at their wide levels and investors are anxious about another bout of market volatility if another regional bank faces a run on deposits due to fears about losses on loan or securities holdings, market participants said.

"The market has found a little bit of footing. It might be worth a look but there is so much uncertainty with these regional banks," Breckinridge Capital Advisors trader Matt Corn said.