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 which have seen assets grow as much as 77 per cent this year, according to data compiled by Bloomberg. At the same time, sales of the debt shrank to €23.6 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 per cent last week. The European Central Bank has signaled that it may buy the securities to help boost the region’s economy.
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 securitisation had a very bad press", said Robert Talbut, chief investment officer at Royal London Asset Management Ltd., which oversees about £75 billion. "The experience of the last few years is that securitisation excluding US mortgage debt has actually performed extremely well."
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 of ABS issued in Europe in 2006 was sold to investors, while 58 per cent of issuance was retained in 2013, according to the AFME. The ECB now holds €307 billion 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.
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