ABCP Trading Shows Greenshoots

Activity in the asset-backed commercial paper (ABCP) market is showing a rise in activity, according to traders of the short-term debt product. The data comes amid a deluge of negative news flow in nearly every aspect of the mortgage market. According to Credit Suisse, most ABCP issuers filled financing needs very quickly throughout trading last week, due to a weakening in supply, flat demand and a surprising increase in dealer participation. The bank is one of the few remaining major players of ABCP in the US market. “Spreads to LIBOR for some issuers improved by as much as 5 to 10 basis points and for those issuers who did not change their pricing,” say the traders. However, they stop short of sounding a bell of optimism as the upcoming May 4 bank stress tests may dent progress. Instead, they assume a strange mix of bearish caution combined with bullish optimism: “Due to the nature of the underlying assets, it does not seem plausible that there will be any material increases in ABCP outstandings over the next few months and therefore, we could see this same sort of action of low to flat supply accompanied by continued pricing power for the issuer. As we all know, we can get kicked in the teeth at any time from another piece of negative financial news; however, we probably will go into the summer in this sort of sweet spot for ABCP issuers.” Levels of ABCP outstandings are indicative of the health of the trade. In an ABCP conference in Paris two years ago, by way of comparison, market traders remained optimistic on the future. At that session, they reported that as long as levels of ABCP outstanding did not dip below January 2005 levels, there would be no reason to worry. At its height, ABCP outstandings stood at $1.2trn in mid 2007. In the beginning of 2005, the market stood at $700bn. But as investors in short term paper fled, being greatly comprised of managers of the now-defunct structured investment vehicle (SIV) product, the market rapidly dipped to $625bn by the end of March 2009. The traders also worry about the impact of current events: “On Friday, Eurodollar futures began to sell off which is not surprising considering the unknowns in the market place, including: earnings, the bank’s stress tests, and the viability of the Fed’s toxic asset purchase plan.” ABCP is a form of property-denominated ‘cash’ that is traded by banks, or other large financials, for the purpose of liquidity, and typically mature between 90 and 180 days.