Monday, August 11, 2008

Scariest Article I've read in weeks.

Asset-Backed Sales May Drop to 10-Year Low in Europe (Update1)

By Neil Unmack

Aug. 11 (Bloomberg) -- Sales of asset-backed bonds, which finance everything from home loans to offices, water companies and pubs, may fall 83 percent in Europe this year to 65 billion euros ($98 billion), the lowest since 1998, Deutsche Bank AG said.

A year after the start of the credit crisis, the asset- backed debt market remains stagnant as investors stung by subprime losses demand record-high yields, damping sales. The European Central Bank took the unprecedented step Aug. 9 last year of offering banks unlimited cash to ease a liquidity squeeze and lenders are increasingly using asset-backed bonds as collateral to borrow.

Banks created about 253 billion euros of asset-backed bonds so far this year, compared with 378 billion in all of last year and a peak of 470 billion euros in 2006, according to Deutsche Bank data. Of the securities issued in 2008, less than 30 billion euros were sold to investors, Deutsche Bank said.

``The overwhelming bulk of securitizations have been designed solely for the purposes of accessing central bank liquidity,'' analysts led by London-based Ganesh Rajendra wrote in a report published on Aug. 8. Creating and keeping bonds to borrow from central banks ``has become a de facto substitute for capital market funding for many banks,'' the analysts wrote.

Subprime Losses

Mounting losses resulting from the collapse of the U.S. subprime-mortgage market have caused money-market funds to stop buying asset-backed commercial paper and forced funds such as structured investment vehicles to unwind holdings, driving up yields. The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages shrunk 40 percent from its peak in July 2007. A basis point is 0.01 percentage point.

Investors demand about 163 basis points more than benchmark rates to buy the highest-rated bonds backed by U.K. mortgages, according to Lehman Brothers Holdings Inc., more than 10 times the spread of a year ago.

This year should mark ``the very trough'' of asset-backed bond sales, the Deutsche Bank analysts wrote. About 45 billion euros of the securities were sold in 1998, the report said.



Zooming interest rates as a result, you think?

AntiCitizenOne said...

I think interest rates will fall, but Bank loan rates will increase.

Interest rates should be going up because of the demand, but that has to be balanced against the currency destruction in non-performing loan write-downs.

Tricky situation! Personally I'd lower interest rates but increase the reserve ratios. Should kill off the crap banks, but leave the good ones.