NEW YORK, June 24 (IFR) - The US structured finance market
came to a standstill on Monday as the continued spike in
Treasury yields gave rise to a fresh bout of deal-execution
uncertainty in the primary market and pushed investors to the
sidelines in the secondary market.
There is however still hope for a revival as opportunistic
investors are expected to look to invest liquidity in such
securities which are still considered "higher quality" despite
the current nervousness in credit markets.
As of mid-afternoon on Monday, the usually-active primary
asset-backed securities market featured no deals while secondary
trades across all securitized assets are now being done only on
a negotiated, private basis.
"The secondary market for non-agency RMBS is in price
discovery mode and people are trying to find equilibrium, but at
this point nobody is going to rush out there one way or
another," said Scott Buchta, head of fixed income strategy at
A paltry US$217.3m in prime and Alt-A non-agency RMBS traded
in the secondary market on Monday morning, along with only
US$446.3m in ABS bid lists and US$453.7m in CMBS, according to
Empirasign Strategies, a capital markets trading database.
Non-agency secondary trading usually runs at more than
double that pace on a typical day, while ABS and CMBS trading
volume is usually at least 25% more, traders said.
There are still many bid lists labeled as DNTs (Did Not
"Guys are more realistic about where the market is," and
whoever is putting out a bid list knows what they're getting
into this week, said one non-agency RMBS trader.
Non-agency RMBS trading volumes extended their weakness in
secondary markets, a trend that started several weeks ago before
the buildup of speculation about the FOMC retreating from its
The handful of private mortgage bonds that were trading were
roughly two points lower than where the market was trading one
week prior, according to analysts at Bank of America Merrill
The highest dollar-price non-agency RMBS bonds with
medium-term average lives were struggling the most, such as
four- or five-year paper priced in the 80-to 90-cents on the
dollar range. Other assets, including corporate-bond securities,
might be more attractive now than this specific type of RMBS,
one trader noted.
CMBS, ABS TRADING SLOWS
Commercial mortgage bond trading was hit as well, continuing
a trend that started last week. According to Barclays, spreads
on a key benchmark legacy CMBS issue - known as GG10 - are now
trading at swaps plus 160bp, 40bp wider than recent tights.
Given the movements in the 10-year Treasury yield, traders
are re-adjusting their yield targets - known as "bogies" in
trader parlance - and the softer tone is expected to continue
till quarter end.
Triple A CMBS bonds trading in the secondary were moving
slowly this morning, a trader said, as dealers kept a distance
from the market in preparation for quarter-end house-cleaning
and month-end redemptions.
"After the dust settles following quarter-end, the market is
going to readjust where they need to be from a returns
standpoint," a CMBS trader said.
In some ways the market was preparing for this dislocation
in market sentiment. A handful of new-issue deals priced wider
in recent weeks.
A US$1.25bn conduit from JP Morgan and Barclays priced wide
on nearly all of the tranches, with a Triple B minus piece
pricing at swaps plus 410bp after price guidance of +400bp, and
a 7-year Triple A piece pricing at swaps plus 108bp after
initial price thoughts of +100bp.
"We expect a slowdown in the pace of issuance two to three
months down the line as loan coupons begin to reflect higher
benchmark rates and wider secondary spreads," said Keerthi
Raghavan, a CMBS analyst at Barclays.
According to S&P, rising interest rates may decrease
issuance of CMBS by US$15bn in 2013, leading to a year-end total
of US$65bn instead of the US$80bn originally predicted. About
US$38bn in CMBS has already been issued year-to-date. In 2012,
there was roughly US$50bn of issuance.
In the agency MBS market, meanwhile, supply was light this
morning at US$300m, with drastically rising rates scaring off
most investing. Pipelines appeared dead, with 30-year coupons
trading at discounts to par.
The gap between Fannie Mae MBS yields and the 10-year
Treasury widened to 0.98 percentage point in the morning, the
widest since last July 31's +1.069 points. However, it narrowed
to 0.95 percentage point by 1pm EST.
The 30-year Fannie Mae current coupon yield stood at 3.61%
as of 9:41 am EST, but lowered several basis points to 3.55% as
of 1pm EST. The yield stood at 3.441% on Friday afternoon.
In the primary US ABS market, supply is expected to be thin,
unlike in a typical June when issuers look to satisfy their
quarter-end funding needs.
"Even the most opportunistic market players are staying away
right now," said a senior ABS banker.
According to Bank of America ABS strategists, senior classes
for auto loan, credit card, equipment, and utility fee ABS are
at the wide-end of 12-month trading ranges and at least 20bp
wider than the tight-end of the same range.
Bank of America's fixed-rate prime auto spreads for one-,
two- and three-year paper were 3bp-5bp wider over the week and
last seen at 20bp, 28bp and 33bp, respectively. Fixed-rate
equipment spreads with the same tenors were 5bp wider on the
week and last quoted at 25bp, 40bp and 45bp.
A meaningful pickup in the ABS primary market, if any, is
expected after the July 4 weekend. Meanwhile, the slowdown in
secondary non-agency RMBS trading may be a buying opportunity
while prices remain cheap.
"Real money accounts may see this as an opportunity to buy
higher quality assets at yields they haven't seen in a while,"
said Buchta from Brean Capital.
Market players pointed to housing data which continues to
come in very strong - a mitigating factor for non-agency RMBS.
In May, existing home sales increased 4.2% month-over-month,
which surpassed expectations, according to Chris Flanagan, the
head of MBS/ABS research at Bank of America Merrill Lynch.
Moreover, housing turnover increased slightly, another good
sign for the market.
Recent weakness "represents a buying opportunity," wrote a
team of JP Morgan MBS analysts led by John Sim in a weekly
"Investors are increasingly bullish on housing. A rate
sell-off should have a small impact on home price growth.
Moreover, we think the reaction to the Fed announcement is
For other related fixed-income quotations, stories and
guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......