(January 9, 2013) — Relaxation of the capital ratios required by the Basel Committee for Banking Supervision could create opportunities for fixed income securities that fell out of favour in the financial crisis, a bond specialist has suggested.
Residential mortgage-backed securities (RMBS), some of which inflicted huge amounts of pain on their holders during the financial crash, could be set to outperform this year, Twenty Four Asset Management said today in a note to investors.
This week, the Basel banking committee said that banks would be allowed to count RMBS towards their Liquidity-Coverage Ratio (LCR) – the buffer institutions need in place to protect them in the event of a run on their liquidity. Up to 15% of the LCR could be held in these securities that are rated AA or higher.
Due to their relatively low risk profile, many European banks hunted them out last year when the Eurozone deposit rate was reduced to zero and institutions still needed yield. However, Twenty Four said there were still deals to be done for investors holding on to the assets that became relatively illiquid following the crash.
“Many of the smaller banks have yet to acquire the expertise to fulfil their BIPRU reporting requirements on these assets. Additionally, new supply has been light, so the larger banks will have struggled to get enough size on board to fill their 15%. Hence we expect the measure can be nothing but supportive for the top end of the European RMBS sector,” the Mark Holman, managing partner at the bond specialist said.
For lower rated RMBS, which had become virtually untraded after the financial crisis, the outlook was also bright, the fund manager said as accounting rule changes had forced down the prices on these securities.
“Where we have seen trade posts, the lower rated, less liquid tranches stand out as the best relative value, not just among RMBS bonds, but across the whole fixed income spectrum,” said Holman.
He added that the latest vote of confidence from the Basel Committee “is only going to serve to highlight this as one of the most compelling opportunities for 2013”.
Elsewhere in the bond market, things do not look so good, according to Ad van Tiggelen, senior investment specialist at ING Investment Management.
Van Tiggelen said: “Bond yields are likely to stay relatively low for the simple reason that our heavily indebted world is not ready to deal with high yields yet.”
He said many did not realise that the current amount of total debt (sovereign, corporate, consumer and financial) in the developed world amounted to around 350% of GDP. This is up from 250% in the 1990s and in the early 1980s, when interest rates exceeded 10%, it was 150%.
“If bond yields would now rise substantially, the current debt levels would gradually become unaffordable and this rise could therefore prove to be ‘self-defeating’ in the end. So, even though we may face clearly higher yields somewhere in the future, it will most likely not be in 2013 or even 2014,” van Tiggelen concluded.