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Structured-Product Values Defying Gravity
Asset Backed Alert, Harrison Scott Publications Inc. (November 12, 2004)

Asset-backed investors won't skip a beat over the next two weeks, even if spreads continue to tighten.

With the exception of bonds backed by home-equity loans, the values of newly issued securitized products are expected to keep inching upward until Thanksgiving, when buyers will step away from the market over the long weekend. But investors will resume trading in full force after that - making bargains scarce until next year.

In fact, buysiders are so eager to vacuum up new top-rated issues that they're willing to accept little or no spread above the benchmarks on new bonds. Of course, they'd prefer larger returns if any were to be found, but the appetite of buyers who typically target other products has simply been too strong.

The fierce demand is good news for issuers who are planning deals for this month, when they're likely to enjoy the lowest funding costs of the year. But their savings aren't as huge as the higher bond values might indicate, due to the fact that rising interest rates have caused benchmark rates to increase as well - leaving absolute yields stable even as spreads contract.

The spread-tightening trend is particularly pronounced among fixed-rate bonds, which haven't been as abundant as floating-rate products this year. That was certainly the case for J.P. Morgan Chase, which sold a triple-A-rated batch of its three-year credit-card bonds at a staggering 1 bp under swaps on Nov. 4. That marked the first time since issuers started using swaps as a benchmark four years ago that such securities have priced below that "psychological barrier," according to J.P. Morgan researchers. "At this new low, fixed-rate spreads in on-the-run sectors could be hard-pressed to tighten any further," they wrote last week.

But USAA Federal Savings Bank has already come close to repeating J.P. Morgan's feat. On Tuesday, the San Antonio lender priced its third auto-loan securitization of the year, offering returns equal to swaps on $385 million of two-year bonds carrying triple-A ratings. A $220 million tranche of similar, three-year securities sold for 1 bp over swaps. Deutsche Bank and Wachovia ran the books on USAA's $1.1 billion transaction, which was backed by loans that it writes to prime-quality borrowers in the U.S. military.

Even issuers of deals backed by less-popular assets are enjoying the current sellers' market. For example, timeshare lender Marriott Ownership Resorts sold $147.5 million of senior four-year notes on Tuesday at 45 bp over swaps. That was 5 bp tighter than initial price talk. Citigroup ran the books on the $181 million offering, which was Orlando-based Marriot's second securitization of the year.

Meanwhile, spreads on top-tier floaters backed by student loans and credit cards tightened by 1 bp over the last week or so, averaging 2 bp over Libor for issues with three-year maturities. It's possible they could narrow by 1-2 bp before Thanksgiving, traders said.

Home-equity loan bonds don't promise to tighten much because the heavy issuance volume that has persisted in that sector all year has given investors plenty of deals to choose from.



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