ABS Investor Update - November 2022

While rising interest rates are generally positive news for European ABS due to the resulting increase in their floating rate coupons, the substantial volatility in UK government bonds recently has seen ABS spreads widen, we believe due in large part to the popularity of the asset class with pension funds as a liquid fixed income allocation alternative. The surge in UK interest rate expectations have also caused disruption in the UK mortgage market, with banks repricing rates upwards to compensate.

Given this backdrop, we thought investors would benefit from hearing our portfolio managers’ views on recent events.

Aza Teeuwen & Doug Charleston gave a brief update on current ABS markets, touching on technicals (such as the impact of pension fund LDI selling on liquidity) and fundamentals (house prices and mortgage affordability).

While we expect volatility to remain prominent into year-end, we also believe that with yields where they are in European ABS, combined with the market’s almost exclusively floating rate format, this could prove to be an excellent entry point for investors with a medium-term horizon.

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