Spreads Explode Higher In The Structured Financial Products Markets

It appears that the ripple effects of the FOMC and a dramatic rise in Yields, are being felt across a broader spectrum of Financial Products; more specifically, the Structured Financial Products .i.e. CLO, CDO, MBS, RMBS, etc… Post FOMC, the spreads of these products have exploded higher, signalling that the FED will in fact Taper Off its Bond Buying program, otherwise know as QE, by the end of this year. New Issuances were also down this month (June ’13).

Here is a more detailed breakdown from Markit Research:

Collateralized Loan Obligation (CLO):

There has been a complete reversal of price movement in this market. Spreads across the capital structure have widened significantly, with 2.0 mezzanine tranches out as much as 75-100 basis points. The US Market saw more price volatility than its European counterpart; however the European side also experienced some softening.

Consumer ABS:

The consumer ABS market has widened out significantly since May month-end, commensurate with broader macro weakness across all of structured products. Generic spreads for top-tier AAA-rated paper are anywhere from 5 to 10 basis points wider, while subordinate top-tier spreads are 10 to 20bps wider. Spreads for esoteric bonds are anywhere from 15 to 30bps wider, depending on asset class/sector. Bonds backed by private student loans have felt the most pressure as spreads have widened on average 20bps for the seniors and 55bps for the subordinates, respectively. This stagnating trend for the consumer ABS market is expected to remain intact for the near term.

New issue for the consumer market was down significantly this month as the widening trend in the secondary may have created a barrier to entry for some issuers looking to access the primary market.

Source: Markit Research

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