ABS issuers to come to market in May should thank Mercedes.
The German auto giant went boldly into a choppy market before Easter and laid down a marker for all those who follow. In doing so it likely took a wider spread — 57bp over one month Euribor for the triple-A tranche — than it needed to if it had waited a few more weeks.
However, the deal provided much need clarity on demand and levels for issuers and investors alike, which is exactly the kind of trade that a market looks to its benchmark prime borrowers to deliver.
The shock to the ABS primary market seemed overdone. The US threatening to impose arbitrary tariffs on almost the entire rest of the world isn’t helpful to consumer credit, but the impact on other sectors like corporates is far more direct and immediate.
Yet those sectors rebounded once the tariffs were pulled. Only this week is the ABS market finishing off dusting itself down from the shock.
A key problem is that there is not enough secondary ABS paper traded and it is hard to infer much from the prints that there are. What the market needed was a primary print everyone could work from and that is exactly what Mercedes provided.
To pull it off it had to take a cautious starting point. At initial price thoughts of 60bp, it was offering its widest spread in over a decade of printing ABS.
Spreads seem unlikely to get back to the pre-tariff tights, but thanks to the pragmatism of Mercedes and the issuers which have followed this week the market does seem to have regained some momentum and saved weeks of umming and erring.
Before the tariffs there was talk of some issuance beginning to build in May. Plenty of macroeconomic risks still loom but if the man in the White House manages to contain his protectionist urges, there’s reason to hope investors will still get their chance to work through that pipeline.