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ABS finds a new equilibrium

Banks readjust after rare correction in asset-backed market Structured credit markets approach the June half-way mark with the spread cycle reversed. All but the most recent new issues are trading below par and the heady times of heavily oversubscribed deals are over for now.

Like other credit sectors, the asset backed securities (ABS) market has suffered unexpected volatility and spread widening. Investors, issuers and dealers are still coming to terms with a sea-change in the dynamics of the market.

"Some people are still long and very wrong and hurting. But there has been a little bit of relief," says Rob Ford, head of secondary trading at Barclays Capital. Ford explains that the primary market has again started to offer investors relative value.

The ABS market outperformed in the first quarter of 2005, with spreads rallying sharply and new investors entering the market. But lead managers on recent transactions have been fortunate if the order book covers the deal.

Flattening credit curve

The bearish tone started following the loss of triple-A ratings on insurance group AIG and was compounded by the downgrades of General Motors and Ford. Interestingly, the structured credit curve has flattened with AAA-rated residential MBS widening by 3bp–4bp, although subordinated classes have remained stable.

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