European and UK ABS and MBS markets displayed resilience in August, despite widespread volatility.

The European and UK ABS and MBS markets in August demonstrated resilience in the face of volatility, according to monthly European and UK factsheets monitored by SCI.

August saw widespread volatility, which notably affected both primary and secondary markets. According to TwentyFour AM Momentum Bond Fund’s managers, despite this turbulence, primary markets demonstrated resilience, especially in the UK BTL sector, with Santander successfully issuing £500m triple-A-rated RMBS bonds. "While this did not see impressive coverage,” TwentyFour says, “it shows strong resilience for primary markets in the face of widespread volatility."

This sentiment is echoed by Aegon European ABS Fund’s managers, who note that despite the broader volatility, European ABS markets performed strongly, driven by favourable supply-demand technicals. "Carry again contributed the most (~95%) as spreads moved sideways to slightly wider," Aegon states.

However, Amundi’s portfolio managers highlight a temporary spread widening in both senior and mezzanine ABS tranches during early August, albeit with a quick recovery. "Spreads on senior ABS tranches widened by about 5-6 bps,” Amundi reports, “but quickly retraced to July levels."

A key area of divergence between the three portfolio management firms lies in the outlook for spreads. Aegon is somewhat cautious about the potential for spreads to tighten further, noting that "there is limited upside for spreads to go tighter on a standalone basis," suggesting any spread movements will likely be driven by idiosyncratic events or central bank actions. Aegon highlights that the European ABS market has seen spreads hovering around the tights of the past three years, signalling limited room for further tightening.

In contrast, TwentyFour expresses a more optimistic view on spread tightening. "The pipeline of new transactions is very large, but early prints show that there is a lot of demand for high-quality paper," the firm says.

Meanwhile, Amundi points to significant demand for mezzanine ABS tranches, which continue to be oversubscribed by up to 10 times, despite some temporary widening. This strong demand has kept spreads attractive for investors in mezzanine tranches, even if volatility creates opportunities for spread widening in the short term.

Although RMBS issuance was relatively muted in August, with just three new issues, TwentyFour foresees a substantial increase for the current month: "We expect RMBS issuance to pick up in September, both with repeat issuers and new entrants."

Similarly, Aegon highlights that while issuance slowed in August, the YTD figure still stood at over €95bn, with RMBS making up 35% of total issuance, followed by CLOs (34%) and consumer ABS (27%). Aegon European ABS Fund’s managers expect the remainder of the year to see sustained issuance, underpinned by "early redemptions and amortisations of ABS structures.”

Amundi, on the other hand, reports a surge in activity toward the end of August, with approximately 10 deals marketed in the last 10 days of the month, including two auto ABS deals in Germany and the Netherlands.

Looking forward, Aegon strikes a more cautious tone: "Surprises will come from central bank communications, incoming data, or the flaccid geopolitical environment."

In terms of fund management, managers at Aegon European ABS Fund’s say: “Overall, we continue to increase our ABS holdings and decreasing our CMBS exposure[…] We have increased our Dutch, Belgian and Finish allocations, while decreasing our UK exposure. Our positioning senior/non-senior decreased slightly to around 61/39.”

In contrast, TwentyFour is more opportunistic: "The PMs are opportunistic about the ability to add good quality risk at attractive prices," although the firm also warns against issuers with weaker collateral locking in funding during favourable conditions. “The team continues to prefer established issuers with a long track record,” it says.

Meanwhile, Amundi appears to be actively navigating both primary and secondary markets. “We participated in the Auto ABS transactions that priced at the end of the month, the Dutch one from Lease plan and the one from Bank 11 in Germany,” it says. “In the secondary market, we sold some portfolio assets to cope with the exits of some investors following the global volatility in the credit markets at the beginning of the month. We also opportunistically bought mezzanine tranches that were offered for sale by some counterparties.”

Fund specifics:

Aegon European ABS Fund returned +0.33% in August 2024. YTD: 5.36%
Fund size: € 6.63bn. ABS/MBS allocation: 72.1%

Amundi ABS returned +0.25% in August 2024. YTD: 4.79%
Fund size: €1.02bn. ABS/MBS allocation: 58.50%

Janus Henderson ABS Fund returned +0.42% in August 2024. YTD: 5.31%
Fund size: £365.2m ABS/MBS allocation: 89.32%

TwentyFour AM Monument Fund returned +0.40% in August 2024. YTD: 5.63%
Fund size: £1.82bn. ABS/MBS allocation: 59.28%

Selvaggia Cataldi