Given Tremendous Demand For ABS Paper, A Surprising Spike In ABX Spread

Asset backed securities (ABS) continue to hit the market in volume, with both high quality as well as subprime paper in high demand.

Top quality:
Bloomberg: Nissan Motor Co. sold $1.4 billion of bonds tied to auto loans at the lowest rate ever as the Federal Reserve’s efforts to spur economic growth reduce borrowing costs.

The company issued the top-rated securities with an average life of 1.49 years to yield 0.481 percent, the lowest financing rate for an auto company in the asset-backed market on record, according to data from Citigroup Inc. (C), the lead manager of the transaction. Though spreads on the debt were narrower in 2006, the higher lending benchmarks boosted the cost, the data show. Subprime:

Bloomberg: Sales of bonds tied to payments on subprime car loans are accelerating at the fastest pace in five years as investors seek high yields amid speculation the Federal Reserve will keep interest rates at record lows until mid-2015.

Led by Santander Consumer USA, issuance of $10 billion this year in asset-backed debt linked to vehicle loans to borrowers with spotty credit records compares with $8.2 billion in the same period of 2011, according to Barclays Plc. Top-ranked securities backed by the loans yield between 15 and 25 basis points more than benchmark swap rates, versus 5 to 8 basis points for similar debt of prime borrowers, Deutsche Bank AG data show. That is why it was surprising to see a spike in the asset backed CDS spread - the "AAA" tranche of asset backed CDS index called ABX (chart below). Given the demand for the bonds, these CDS spreads should be tightening.

It seems someone is trying to hedge a large ABS position and this index may be the best available proxy. It could also be the banks hedging their purchase of remaining Maiden Lane assets (before distributing them to clients).

FoxBusiness: The Federal Reserve Bank of New York is set to sell the last of the assets taken on during the bailout of American International Group (AIG) by next month, based on the current pace.

The New York Fed plans to sell another $11.9 billion in face value of complex mortgage debt from the vehicle known as Maiden Lane III this month, which would reduce the amount left in the portfolio to less than $7 billion. Maiden Lane assets are different from the constituents of ABX, but again ABX could be the best proxy with any liquidity. If so, this should be a temporary move.

Whatever the case, analysts are tracking this index and the ABS market in general quite closely because the development/recovery of ABS is critical to US economic growth (these markets freezing was the whole reason behind TALF).