U S F i x e d I n c o m e M a r k e t s 2 0 0 5 O u t l o o k
2005 key points –ABS and CDOs
Multi-year tight spread environment, the result of extremely accommodative monetary policy ofpast few years, enters year 2.
Record year for US ABS in 2004, with close to $600 billion in issuance. Spreads are at historictights.
Repeating 2004, home equities should continue to dominate. $375 billion in issuance anticipatedfor 2005 –down slightly from 2004’s $400 billion pace.
Heavy issuance and excessive concerns about housing bubble continue to create some spreadvolatility for home equities –and one of the best relative value opportunities in fixed incomemarket, especially seniors. New rating agency Libor stress scenarios provide additionalconservatism and support for home equities.
Former benchmark ABS sectors, credit cards and autos, remain at historically tight spreads withminimal volatility. The same holds for Student Loan ABS and Global RMBS.
2004 was an unequivocally positive year for the CDO market, withincreased supply and tighteningspreads.
CDOs continued their transformation into a core asset class in the fixed income market.
More spread tightening likely, best value in mezzanine cash and “second senior” syntheticpaper.
Global structured credit bid for assets will remain huge.
Close to $115 billion in cash CDO issuance anticipated for 2005 (85/15 US/European asset split,50/50 Corporate/ABS split).
$600+ billion estimated synthetic “issuance” in 2004 growing to close to $800 billion in 2005(50/50 US/European, 90/10 Corporate/ABS).