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Business News/ News / World/  Sales of Asset-Backed Bonds Soar Ahead of Trump-Biden Rematch, Rate Cut Decisions
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Sales of Asset-Backed Bonds Soar Ahead of Trump-Biden Rematch, Rate Cut Decisions

Wall Street’s securitization engine is revving up with issuance touching record levels as borrowers rush to secure funding before any credit market disruptions caused by the US general election.

Sales of Asset-Backed Bonds Soar Ahead of Trump-Biden Rematch, Rate Cut DecisionsPremium
Sales of Asset-Backed Bonds Soar Ahead of Trump-Biden Rematch, Rate Cut Decisions

(Bloomberg) -- Wall Street’s securitization engine is revving up with issuance touching record levels as borrowers rush to secure funding before any credit market disruptions caused by the US general election.

In the first quarter, investors snatched up $95.6 billion of bonds backed by assets like auto loans, data centers and credit card debt. That’s the fastest pace of sales to start a year since at least 2010, according to data from Bank of America Corp.

A mix of demand- and supply-side factors are behind the surge, says Cory Wishengrad, head of fixed income at Guggenheim Securities. “The convergence of a lower interest rate environment, historically compelling relative value and solid underlying asset performance given the resilient economic backdrop has stoked demand for structured products, with many investors increasing allocations relative to corporate debt in the new year," he said. 

“The lower benchmarks and tighter spreads have motivated issuers to come to market, resulting in robust supply," he added. ABS spreads stood at 54 basis points over Treasuries as of Wednesday, having narrowed more than 30 basis points since a November high — creating a window of opportunity for borrowers to lock in the low risk premiums before the Federal Reserve cuts interest rates, now anticipated to be after the summer.

But for some investors, the tight new issue spreads aren’t that exciting an investment proposition. Ben Hunsaker, a portfolio manager at Beach Point Capital Management, points out that spreads have tightened across all credit products on the back of soaring investor demand, especially from insurance capital.

“Simply put, demand for credit products seemed to outstrip immediately available supply so far this year," he said. 

US blue-chip firms notched their busiest first quarter ever with $529 billion of issuance, smashing the previous record of $479 billion in the first quarter of 2020. And riskier borrowers are riding a refinancing wave as high-yield spreads hover at 329 basis points, after recently nearing a two-year low. 

ABS risk premiums offer an alternative to the comparatively low premiums found in the high-yield and investment-grade corporate debt markets, according to Hunsaker. “Those with a mandate to be invested and long credit at all times will color with the least dull crayons that can be found in the crayon box," he said. 

Read More: A $700 Billion Product Is Powering US Credit Market Rally

Citigroup Inc. analyst Eugene Belostotsky notes that this year’s issuance calendar has been front-loaded because of the upcoming US election as well as borrowers taking advantage of lower issuance costs. “It’s not just the presidential election," he said. “It’s also an issue of if one party will control both Congress and the White House, it would be much easier to push through legislations. That’s an important consideration."

“Markets like divided government, it doesn’t matter who wins what, but just so that it’s divided" he added. “But if it goes one way, then policy can change."

Read More: ABS Issuers Likely Front Loading 2024 Primary Supply: JPM Says

There could also be renewed concerns regarding inflation and rates during the US presidential race, according to BofA Securities’ head of ABS Strategy Theresa O’Neill, as issuers typically dislike anything that creates volatility and impacts pricing. “We could see a drop off in volumes around September from the election," she said. 

“Issuers also like to avoid Fed meetings because they don’t want to get caught with a surprise rate move," O’Neill added. “Spreads are important, but so are benchmarks."

Belostotsky predicts $275 billion of total ABS issuance in 2024, roughly in line with O’Neill’s forecast of about $270 billion for the year. “We saw spreads come under pressure in 2023 because of a heavy calendar," said O’Neill. “Generally as we enter the new year, we see spread tightening. The feeling is some issuers were waiting for the year to turn."

The burst of fresh ABS sales in 2024 is about 46% higher than this same point last year, data compiled by Bloomberg News shows. “Given the regional banking crisis and expectation of holding higher capital, we’ve been seeing a few banks issuing CRTs and do more ABS deals that we would call balance sheet optimization," said O’Neill.

Banks have also been issuing more credit-card linked ABS, with about $6.4 billion of such deals notched in the first quarter of 2024, compared to roughly $1.5 billion in the first quarter of 2023, according to data from Bank of America.

Barclays Plc strategist Powell Eddins predicts that credit card ABS supply will outpace maturities in 2024 as banks diversify their funding sources. 

“Some of the card increase reflect expected roll-off for 2024 and actual roll-off in 2023, and we’ve also seen new entrants like Wells Fargo," added O’Neill. 

Wells Fargo priced its inaugural credit card ABS in late February, a spokesperson for the bank confirmed, while declining to comment further. It was able to upsize the transaction to $1.25 billion from $500 million, Bloomberg reported at the time. 

Eddins anticipates $280 billion of overall primary ABS issuance in 2024 — which would set a post-Great Financial Crisis record — while Morgan Stanley analysts expect supply to grow to $295 billion.

--With assistance from Charles Williams and Scott Carpenter.

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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Published: 18 Apr 2024, 11:20 PM IST
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