Nine months ago you could buy really solid AAA UK RMBS at between 60-70% of face value. I and some others pointed out this outstanding buy opportunity at the time. Now the price is 90-100. Has the buying opportunity gone, or is there still value to be had?
An institution such as an insurance company or pension fund which invests in fixed income could be expected to have put a lot of money into Gilts or other sovereign bonds in the last couple of years. The income might be poor, but you couldn't be blamed/fired for being risk averse. But there are now good reasons to look again at ABS:
-Sovereign risk. Taking Ireland as an example, Fitch rates the sovereign at AA-. But you can buy Irish ABS which is still AAA, three notches higher. (Sovereign risk is not the same as country risk). The UK could well be downgraded in the medium term. ABS offers a good yield at a higher rating than many governments are or might be.
-Rating stability. Yes, in spite of what sensationalist journalists might write, Standard and Poor's points out "between mid-2007 and the third quarter of [2009], more than 98% of our 'AAA' ratings outstanding on European residential mortgage-backed securities (RMBS) and consumer asset-backed securities (ABS) remained AAA".
-Risk diversification. What it says on the tin.
-Quantity of sovereign debt. A lot of governments have an awful lot of money to raise. This might impact on the price of sovereign bonds currently held.
We are recommending to institutional investors that they look carefully at the benefits of investing a proportion of their money in ABS. This obviously involves having a thorough knowledge of ABS to find the right bonds, and avoid the wrong ones. Which is where we come in.
Calendar
