Amundi: The role of fixed income in strengthening European autonomy
By Hubert Vannier, Head of Securitized Assets, Amundi
The USA is moving from the Pax Americana regime to America First foreign policy. The motive is economic dominance, with the USA choosing protectionism, racing to seize natural resources in Venezuela, and potentially in Iran and even Greenland.
Amid these geopolitical uncertainties, European economic weaknesses come under the spotlight. Insufficient investments in technology, notably AI, in energy transition, or more recently, in defence are acute. Financing these investments is one of the main challenges of European policy makers. Regulation changes to support the financing of the economy are already happening. European institutions have adopted Solvency 2 improvements and are in a trilogue process for banking and securitisation regulations.
Securitizations externalizes risk from the asset seller’s balance sheet, potentially providing not only funding but capital relief as well, allowing the seller to lend again, in a virtuous cycle. Because they support financing autonomy and directly rely on European assets, securitizations are viewed as a key instrument for economical sovereignty.
Currently the largest securitizations, representing half of the market, are not sold to investors but retained by sellers and used as collateral with central banks. In our view, this means the market could double its size should economic conditions be met, i.e. should spreads tighten.
Securitization markets have followed the same pattern during the various crisis of the last 15 years, but the recent widening of securitization spreads has been much smaller than expected considering their pre-crisis absolute levels. This moderate widening can be explained by three main factors, which make the European securitisation market especially resilient:
- First the credit risk of collateral is limited, and the structures have been designed to absorb such shocks. ABS and RMBS rely on loans to households. They are not directly affected by sovereign, financial or corporate risks but are more sensitive to unemployment. CLOs are more sensitive, especially high yield tranches, but benefit from reinforced structures. High yield mezzanine tranches spreads have significantly widened but there is no downgrade trend or default.
- Securitization spreads benefit from a widening investor base as regulation changes allow insurance companies and banks to access the asset class.
- Finally, the nature of market participants is key: weak hands no longer invest in securitizations since the global financial crisis and there are no forced sales of securitizations.
European securitizations spreads react moderately to market shocks, and the recent regulation changes are expected to provide long-term support. This rare asymmetry, with a reduced sensitivity to crises and the benefit of spread tightening in times of normalization should attract investors interest.
Other assets with higher beta may provide higher returns, should a favourable scenario occur, but such investments incur significantly higher geopolitical or macro risk, particularly as a stagflation scenario becomes more probable.
Securitizations, as floating rate notes are not exposed to interest rate volatility. They provide investors with moderate credit exposure, which has a low correlation with other fixed income assets and benefit from higher spreads.