RMBS issuance in the toilet

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From S&P:

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Investor sentiment will continue to be a key influence on new issuance prospects, with domestic and global financial market conditions, regulatory developments, investor confidence and risk pricing also being influential factors. After picking up in the years following the global financial crisis, new issuance volumes fell in 2015 and have been relatively lackluster in the first half of 2016. Renewed volatility in global markets and regulatory developments took their toll on RMBS new issuance volumes and pricing, and spreads widened considerably in the second half of 2015. Chart 1 shows the issuance volumes of Australian RMBS by market placement from 1994 to 2016 (YTD).

Globally, structured finance new issuance has been affected by the regulatory treatment of securitization instruments. This will remain a key driver of investment demand and liquidity in coming years, in our opinion. In the Australian context, bank balance sheets have primarily driven demand for RMBS in recent years. Banks have been ramping up their eligible collateral for committed liquidity facility (CLF) purposes because Australian prime RMBS are classified as eligible securities under the Reserve Bank of Australia (RBA)’s CLF. A reduction in the size of the CLF available to banks in late 2015 has led to a drop in demand for this asset class. Ongoing regulatory developments domestically and internationally, in addition to concerns over the impact of a slowing Chinese economy, will likely result in lower new issuance in 2016 than in previous years, in our opinion.

This is not just CLF, it is RMBS becoming borderline uneconomic throughout this year as wholesale spreads blew out. There must be quite a few non-bank and second-tier bank mortgage warehouses around the joint that are positively brimming…

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.