UPDATE 2-ABS, ABX at bottom; extraordinary value seen-JPMorgan
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By Nancy Leinfuss
NEW YORK, Sept 19 (Reuters) - JPMorgan Securities said on Friday the actions taken by the U.S. government aimed at stemming systemic risk have created a bottom in prices for cash and derivative segments of the asset-backed securities market.
"The actions taken this week and those that are forthcoming make it extremely likely that we have seen the bottom in ABS, ABX and non-agency MBS prices," said Chris Flanagan, analyst at JPMorgan Securities. "Even after Friday morning's sharp rally, we still see extraordinary value and move to overweight," the analyst said in a report.
Treasury Secretary Henry Paulson on Friday called for the U.S. government to spend hundreds of billions of dollars to take so-called toxic mortgage assets off the books of financial firms to restore financial stability.
The surprise move comes as the Treasury and Federal Reserve consider broad government intervention to prevent the collapse of the financial system, shaken in recent days by a crisis at insurer American International Group (AIG.N) that required a $85 billion government rescue and the bankruptcy of investment bank Lehman Brothers Holdings Inc (LEHMQ.PK). For details, see [ID:nLJ642958]
"What the RTC-type response along with the other policy moves does is address -- and put a floor on -- the capital inadequacy issue for the banking system, which had been deteriorating rapidly as the events of this week were transpiring," said Flanagan.
"With good policy now in place, we look to expand risk taking and look for returns in the lowest priced, longest duration risk in ABX," the analyst said.
Flanagan also said top slices of subprime mortgage indexes including, the ABX 07-1 and ABX 07-2 "PENAAA" and "AAA" segments as well as the "AA" layer of the ABX 06-1 index, offer the best value.
In consumer ABS, top-tier credit card and auto ABS issues offer the best value, the analyst said, and recommended investors rotate out of FFELP student loans. (Reporting by Nancy Leinfuss; Editing by Gary Crosse)
