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Asset-backed debt losses mount as Draghi support proves feeble

Investors in Europe's asset-backed securities market thought they'd scored a win when Mario Draghi endorsed the debt last year.

[LONDON] Investors in Europe's asset-backed securities market thought they'd scored a win when Mario Draghi endorsed the debt last year. Now the notes are poised for their first annual decline since 2011 after five straight months of losses.

Bonds backed by business loans, mortgages and credit-card debt from the Netherlands to Spain lost an average 0.5 per cent this year through Sept. 3, according data compiled by Barclays Plc. That's on track for the first annual decline since the securities lost 2.6 per cent in 2011, the data show.

The European Central Bank's attempts to encourage lending in the region by buying asset-backed bonds have underwhelmed investors, leading to the reversal of gains in some securities that rallied after investors prepared for large ECB purchases. The Greek debt crisis and turmoil in Chinese equity markets have also contributed to losses.

"Before the ABS programme began, everyone thought ABS was a one way bet - they were positioned in one direction," said Ruben Van Leeuwen, an analyst at Rabobank in Utrecht, the Netherlands. "They didn't get entirely what they expected."

The 643 million-euro (S$1.02 billion) Julius Baer Multibond - ABS Fund, co-managed by Matthias Wildhaber and Laurence Kubli, lost 0.5 per cent this year, according to data compiled by Bloomberg. The US$955 million Credit Suisse Lux Global Securitized Bond Fund, which is managed by Robert Wakiyama, lost 0.6 per cent, the data show.

"After a two-year rally, global ABS experienced a spread widening back to early 2014 levels over the last four months," said Zurich-based Wakiyama. "We view the recent price action as a healthy correction."

The 2.8 billion-pound (S$6 billion) Insight Libor Plus Fund, which invests in ABS and corporate floating-rate notes, lost 0.17 per cent in August. Even so, it has returned 0.65 per cent this year, the data show.

"Despite the market weakness we've seen, we continue to believe that the long-term strategic value of the asset class remains exceptionally strong," said Shaheer Guirguis, the manager of the Insight fund. "If anything, the recent spread widening is making the value proposition even stronger."

In anticipation of the ECB buying up swathes of the market, the average yield premium investors demand to hold ABS on top of benchmark rates fell to a seven-year low of 70 basis points in October, according to data compiled by Barclays. The spread has since widened to an average 96 basis points.

The ECB has purchased 11.1 billion euros of asset-backed debt since November, about 10 per cent of the amount of covered bonds bought under a separate program. Investors initially estimated the ECB would acquire 50 billion euros a year of ABS, according to Wildhaber, who manages the Julius Baer fund.

ECB Governing Council member Ewald Nowotny said on Friday its asset-backed securities purchase programme "hasn't been as successful as we'd hoped." He said insufficient supply of assets was to blame.

Acquisitions have also been hindered by an approval process that takes as long as five days because purchases are handled by third party asset managers while investment decisions are made by the central bank. The ECB's holdings of asset-backed debt fell for the first time since January last week as it struggled to acquire enough new bonds to replace maturing debt.

"Once people realised that the ECB was purchasing at a much slower rate than expected, many ABS sectors that had previously rallied gave up their gains," said Mr Wildhaber. "The market has also not been immune to the broader risk aversion."

While faring worse than covered bonds, which have delivered a gain of 0.51 per cent this year, losses on ABS were smaller than the 0.86 per cent loss on euro-denominated investment-grade corporate notes, according to Bank of America MerrillLynch indexes.

"ABS was by no means the only underperformer in recent months," said Manuel Trojovsky, a Munich-based analyst at UniCredit Bank AG.

"Covered bonds and a number of high-grade corporate bond sectors also show pretty meager or even negative total returns, especially the ones with longer durations."


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