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European ABS Market Update

Worldwide COVID-19 infections have passed the 25 million mark, as we continue to see 250k cases a day despite the fact that we are 6 months into the pandemic. The number of cases in Europe has been rising modestly from low levels while new cases in the US seem to be falling from stubbornly high levels. While death and hospitalization rates have improved significantly and vaccine progress appears positive, the drag on the global economy remains significant. Economic activity remains depressed and travel restrictions change on a seemingly daily basis with little notice. As the summer passes, the next hurdle is school openings, which are essential to parents returning to work. Away from the pandemic, the market is increasingly looking towards the upcoming US elections which will have a significant impact on both the US-China relationship as well as global trade pacts.

On the monetary policy front, the Federal Reserve announced that it is adopting a flexible inflation target which could rise above its current level of 2%. This could potentially lead the ECB (and other central banks) to follow suit as it is currently conducting its first strategic review since 2003. Conversely, there have been few developments on the fiscal policy front since the agreement on the EU Recovery Fund was reached. Fiscal stimulus talks in the US have stalled with a significant gap between the $3 trillion HEROS act by Democrats and the $1 trillion HEALS act proposed by Republicans. While it remains likely a deal will be reached ahead of the upcoming elections, it appears that the slowly recovering labor market has removed some of the political pressure for the moment, at least until Congress returns after Labor Day.

European ABS issuance continued to push higher to EUR 29.0 billion YTD, approx. 70% of the 2019 volume. There were five securitisations in August which remain largely retained and pre-placed. Among the deals were two new originators, including an auto loan ABS from Olympic Commercial, a Greek originator, and a consumer loan ABS announced by My Money Bank, formerly known as GE Money Bank. Low new issue supply continues to support secondary ABS spreads which were flat to slightly tighter during the last summer month.

Below is an overview of the one week spread change in various ABS segments, compared to investment grade and high yield corporate credit as of August 31st, 2020:

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