The rally in fixed-rate asset backeds appears to be over, according to several investors and Wall Street analysts, who point out that nearly $1 billion in fixed-rate credit card receivables were traded or sold last week, pushing spreads to levels that give investors little incentive to take on risk. Half of the activity was a $500 million fixed-rate deal fromBank One, with a bid list of fixed-rate cards making up the other chunk. Bank One's five-year, triple-A notes were sold at seven basis points over swaps--a full four basis points tighter than where MBNA sold a similar deal about a month ago. Both are benchmark card issuers, and market pros say the pricing of the Bank One deal indicates that spreads cannot go much tighter and are ripe to widen in the coming weeks and months.
One trader explains that fixed-rate paper has been in demand because most issuance over the last year and a half has been of variable-rate bonds, but that current levels of fixed-rate securities may be too rich for investors. "Triple-A spreads will widen over the second half of the year as investors refocus on credit fundamentals," predicts David Heike, senior v.p. and head of ABS research at Lehman Brothers.
Traders attribute the recent tightening to technicals and predict it probably won't keep up the pace. "Some people think the market's run its course at this point," a trader says. "When you look at other sectors, [benchmark cards] are not as attractive right now," says Wil Stith, portfolio manager at Allied Investment Advisors. He adds the bid lists indicate that "people are looking to get out of sectors that are very rich and liquid."
While five-year cards, currently at nine basis points over swaps, are not at historically tight levels, they appear too rich given a broader economic environment where unemployment remains above 6%, analysts argue. "Not that spreads will blow out, but the downside is definitely greater than the upside at this point," says one Street analyst.
Another observer predicts some issuers may try to "fund into a window" and take advantage of the abnormally tight levels by launching fixed-rate deals in the near future.
