Credit Weekly: Bank Asset Sale Boosts Bond Market

Banks are turning to the booming sector of the bond market to dump assets in response to the latest round of global capital rules, known as Basel III endgame. The rules are expected to make it more expensive for banks to hold onto certain loans, prompting them to bundle auto loans, equipment leases, and other types of debt into asset-backed securities.

In the US alone, ABS sales have exceeded $170 billion this year, up 38% from the same time last year. Europe has also seen a similar increase, with issuance reaching about €21 billion ($22.9 billion) this year, up 35% from last year.

The trend of ABS issuance shows no signs of slowing down, with Bank of America strategists raising their full-year US sales predictions to $310 billion from $270 billion. The bonds are finding eager buyers among credit investors, with attendees at a global ABS conference expressing optimism about the market.

Investors are even showing interest in asset-backeds supported by exotic assets like art from Rembrandt van Rijn and Andy Warhol, as well as internet protocol addresses. The demand for securities with strong ratings and high yields has led to the popularity of esoteric securitizations, such as data center and solar panel securitizations.

While some issuers may be accelerating their sales to avoid volatility from the US presidential election or Federal Reserve policy changes, the growing issuance of ABS indicates banks’ preparations for tougher capital rules. Lenders have lined up new deals for sale, including auto bonds from Santander and Toyota, demonstrating the continued strength of the market.