The $2 trillion asset-backed securities market in Europe is out of kilter as growing demand for the debt, which policy makers are promoting as a savior for the region’s economy, meets shrinking supply.
Investors have been pouring money into ABS funds managed by Amundi, the region’s largest asset manager, Credit Suisse Group AG (CSSIFAB), Julius Baer Group Ltd. and YCAP Asset Management, which have seen assets grow as much as 77 percent this year, according to data compiled by Bloomberg. At the same time, sales of the debt shrank to 23.6 billion euros ($32.3 billion), the least in five years, JPMorgan Chase & Co. data show.
Buyers that shunned asset-backed debt during the credit crisis are now seeking out the notes as yields on corporate bonds dropped to a record 1.62 percent last week. The European Central Bank has signaled that it may buy the securities to help boost the region’s economy.
“We face disequilibrium,” said Paris-based Hubert Vannier, who manages an ABS fund for Amundi, which oversees about 800 billion euros. “There are too few assets being offered compared to the actual demand.”
The average extra yield investors demand to hold senior bonds backed by Spanish mortgages, compared with benchmark rates, fell 184 basis points to 105 basis points since January 2013. Yields on similarly-rated corporate bonds narrowed 55 basis points to 185 basis points, according to Citigroup Inc.
The attractiveness of the ABS market is being supported by policy makers promoting the virtues of high-quality securitizations and signaling transactions that are simple and well structured could benefit from favorable regulatory treatment.
“We have come through a period where all forms of securitization had a very bad press,” said Robert Talbut, chief investment officer at Royal London Asset Management Ltd., which oversees about 75 billion pounds ($126 billion). “The experience of the last few years is that securitization excluding U.S. mortgage debt has actually performed extremely well.”
After opening its Credit Suisse Lux Global Securitized Bond Fund to external investors for the first time in March, the Swiss bank has seen more than $500 million of inflows, boosting assets to $1.2 billion, according to the fund’s manager Robert Wakiyama.
“Looking at how much interest there is in new issues and observing the broadening investor base, we see promising signs for the ABS market,” said Zurich-based Wakiyama.
Increased investment in the Amundi ABS fund, which buys bonds backed by commercial mortgages to auto loans, helped boost total assets to 312 million euros, the most since July 2007, according to data compiled by Bloomberg. The Julius Baer Multibond - ABS Fund (JBMABSA) oversees 265 million euros, the most since October 2008, after adding 114 million euros in April.
“It’s more difficult to buy than it was two or three years ago,” said Matthias Wildhaber who manages the Julius Baer fund. “You can still find paper if you are buying one million here or two million there, but if you are a one billion fund trying to invest 10 percent in ABS it will be difficult to find big blocks.”
Europe’s ABS market was pushed underground by the financial crisis. Instead of selling asset-backed bonds to investors, banks chose to issue and retain the securities so they could be used as collateral for borrowing from the ECB.
All of the 478 billion euros of ABS issued in Europe in 2006 was sold to investors, while 58 percent of issuance was retained in 2013, according to the Association for Financial Markets in Europe.
The ECB now holds 307 billion euros of notes as collateral and is considering making direct purchases of ABS as part of efforts to counter sluggish economic growth. Mario Draghi, the central bank’s President, says this will help free up bank balance sheets so they can increase lending to small businesses.
“If the ECB would buy more ABS as part of a quantitative easing program this is likely to crowd out investors even further,” said Angelien Kemna, APG Groep chief investment officer.