(Bloomberg) -- Uncertainty over whether the US central bank will be able to curb inflation has roiled the structured market, with some companies delaying their deals amid mounting risk.

While companies initially halted bond sales in February after Russia’s invasion of Ukraine, geopolitical tumult is no longer the main concern weighing on investors’ minds. Now its the looming possibility of a recession and the central bank’s rapid rate hikes that seem to be front and center. Last week, the Federal Reserve raised interest rates by 50 basis points, marking the biggest increase since 2000, and said that more half-point raises would be coming. 

“Rates have blown out so liquidity is becoming an issue for some,” said Peter Troisi, partner and head of investments at Balbec Capital Managment, in a phone interview.

Money managers have started pricing in the risk of a recession, as they wager whether the Fed will be able to engineer a “soft landing” -- a slow economic downturn -- to dampen inflation. This has resulted in wider spreads across all structured products. On Thursday, DriveTime priced its latest offering of subprime auto asset-backed securities, featuring a AAA rated portion that yielded 2.898%, compared to the equivalent tranche of a similar security in February that yielded 1.59%. 

“This is going to be the least surprising recession we’ve ever had,” said John Kerschner, head of US securitized products at Janus Henderson Investors, in a phone interview. “Everyone is expecting it.”

Widening spreads has also meant that some issuers have tabled the sale of their bonds until a more favorable financing window opens up. China’s Dajia Insurance Group Co. put an $811 million mortgage-bond deal tied to five luxury hotels on hold, while the Canadian Bank of Imperial Commerce paused a roughly $540 million credit card asset-backed securities offering in late April. 

The two deals are the latest in a string of transactions that stalled, starting from February. Among them were “buy now, pay later” lender Affirm, auto lender World Omni Financial Corp. and Tesla Inc., which delayed issuances of notes that bundled consumer credit. Two other commercial mortgage bond issuers also halted sales around that time. 

Since then, both Affirm and World Omni have come back to the market.

Relative Value: CRT

  • Tracy Chen, portfolio manager at Brandywine Global Investment, is looking at the credit risk transfer market for relative value opportunities as the B2 tranche of CRT is trading wider through 1,000 basis points in new issue deals
  • Another product investors should look at is the BBB tranche CMBS, which is trading above  8% yield, she said
  • The BB CLO tranche is also attractive and trading at double digits, Chen said


Re: auto ABS: “The market is not crashing, it’s normalizing,” said Alin Florea, an auto ABS strategist at Barclays, in a phone interview. “I think we are going to see auto delinquency and loss rates in 2022 perform better than the pre-pandemic average.”

What’s Next

ABS deals in the queue include Carvana (prime auto ABS), HPE Financial Services (equipment ABS), Flagship (subprime auto ABS) and Navient (student loan ABS).

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