PT - JOURNAL ARTICLE AU - Jian Hu AU - Richard Cantor TI - The Relationship Between Issuance Spreads and Credit Performance of Structured Finance Securities AID - 10.3905/jfi.2006.640273 DP - 2006 Jun 30 TA - The Journal of Fixed Income PG - 5--20 VI - 16 IP - 1 4099 - https://pm-research.com/content/16/1/5.short 4100 - https://pm-research.com/content/16/1/5.full AB - This article analyzes the relationship between structured finance par coupon spreads at issuance and the securities' credit performance. Using floating and fixed rate structured finance securities that include asset-backed, mortgage-backed, and collateralized debt obligations issued in the U.S. during 1998-2004, we find spreads vary substantially by rating, over time, and across asset classes; the spreads on structured finance securities are correlated with, and generally wider than, those on similarly rated corporate securities. Highly rated securities such as those rated Aaa contain more systematic risk components than do lowly rated ones such as those rated Baa. Spreads are backward looking in the sense that new issue spreads widen after downgrade rates rise on outstanding securities within the same asset class. Spreads also anticipate future credit performance in the sense that securities with wider spreads at issuance (conditional on sector, rating, and general market conditions) are more likely to experience subsequent rating downgrades than other securities.TOPICS: Asset-backed securities (ABS), credit risk management