-- Olivia Thetgyi
Members on the “Unlocking Liquidity in the ABS Markets” panel noted liquidity has returned, but warned against exuberance. “Liquidity is back. The questions is, is stupidity back?” Evan Kestenberg, trader at The Seaport Group, said at the ABS East conference today.
Panelists pointed to the run-up in mortgage-backed securities prices as evidence of increased liquidity. Liquidity has gone overboard, however, in some sectors. Kestenberg pointed to aircraft ABS as an example. That market, which had seen only one to two bids in the market over the past year, was now seeing 15 bids and yields had dropped to the single digits. This was happening despite high levels of distress and “horrible” fundamentals, he said.
The market should guard against premature exuberance, panelists warned. “It’s interesting to note how quickly people have gotten comfortable with the new paradigm of higher defaults. If interest rates do go up, I think this could very quickly turn around on all of us,” said Sadie Gurley, senior portfolio manager at Marathon Asset Management. Other speakers noted that reality does not support the rally. “The fundamentals aren’t there. It’s really very tenuous,” said David Castillo, senior managing director at Further Lane Securities. He reminded the audience that the leverage currently seen in the market came straight from Washington and that the long-term future of the market depends on new issuance. “What are we going to securitize? Last time I looked, the consumer didn’t have any credit left – we’ve tapped them out.”
A lot of questions marks hang over the market, commented Ryan King, consumer ABS trader at Broadpoint Descap. “I’m curious to see what happens when [the Term Asset-Backed Securities Loan Facility] ends, when China quits buying. It’d be interesting to see what happens when the homebuyer tax credit ends, when the other shoe drops in commercial mortgage-backed securities,” he said. “There are so many factors but you’re never going to go back to ‘05 and ‘06.”