Let’s be frank… they will have a limited effect until they have an unlimited effect. Beware of unhedgeable spread risk. Here we go again!
About 190 rated tranches in European residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) had coupons at negative levels as of Q1 2016, says. Almost 50% of these tranches are concentrated in Spain and 80% correspond to RMBS tranches, which are also reaching negative coupons calculated according to the transaction documents. However, the vast majority of issuers are choosing to floor these coupons at zero in the absence of explicit reference to negative interest in the documentation. By year end, the number of rated RMBS and ABS tranches with negative coupons may increase to about 550 tranches, projects the ratings agency.
“The immediate impact has been a fall in excess spreads in deals that have interest rate swaps. By year-end, we expect that the average annual impact will be a fall of 15 basis points (bps). As of Q1 2016, the average annual impact was a decrease of 4bps,” says Antonio Tena, a Vice President at Moody’s.