KBRA’s ABS Outlook Reports Second Year of Solid Returns

According to Kroll Bond Rating Agency’s 2018 ABS outlook, the major themes in the ABS market over the past year have been strong investor demand, stable credit fundamentals and a flattening yield curve, all of which contributed to the second consecutive year of solid returns.

Across all asset classes and up and down the credit curve, ABS spreads have been stable or trending tighter since early 2016 as demand far outpaced supply and investors continue their hunt for yield further down the capital stack and into the more esoteric corners of the market.

KBRA anticipates more of the same in 2018, as technicals should remain supportive. Investor demand shows no signs of abatement, ABS credit fundamentals appear sound, and as all-in yields march higher with each Fed rate hike, KBRA thinks ABS spreads have some room to tighten further.

However, with spreads already at multi-year tights, there is likely limited potential for further tightening at the higher investment grade level, but there may still be some room to tighten further down the credit curve.

From a credit perspective, ABS risks appear mostly benign. The financial condition of the U.S. consumer is healthy, with household leverage at cyclical lows and household disposable income to debt service payments at an all-time high. With the economy continuing to add jobs at a fairly healthy clip, albeit at a slowing pace as we approach full employment, it’s hard to foresee a derailment of consumer credit over the next 12 months.

Meanwhile, a strong consumer and expanding U.S. economy should help bolster further business expansion next year, which will be supportive of commercial ABS sectors, such as whole business, aircraft and railcar ABS.

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