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Asset-backeds - Investors snap up subprime deals

NEW YORK, Jan 24 Reuters reported that investors snapped up on Thursday $1 billion U.S. asset-backed securities, supported by subprime consumer loans, indicating the enormous appetite for bonds that offer higher yields than Treasuries.

``There's a lot of cash, and people like safety. And this is AAA-rated stuff,'' said Dan Castro, head of ABS research at Merrill Lynch.

Investors, on hopes an economic recovery is not far off, have been betting that spread products such as asset-backeds would earn higher returns than U.S. Treasuries, even if the Federal Reserve winds down its aggressive rate-cutting campaign that began a year ago.

``The worst with the economy may be over. People are trying to figure out what the recovery would be,'' said a bond portfolio manager at an institutional money management firm.

In a poll conducted by Reuters on Thursday, 22 of 24 Wall Street bond dealers said the U.S central bank is done with cutting interest rates, and the Fed would keep interest rates steady until the second half of the year.

Even if interest rates creep higher later this year and hurt bond prices, asset-backeds and other spread products have offered adequate yields to offset a price deterioration, the portfolio manager said.

SUBPRIME DEALS TESTED

Benchmark asset-backed issuers such as Citibank , Ford Motor Co. and MBNA Corp. have fetched heavy demand for their supply in recent days. Yield spreads -- risk premiums -- on their paper have priced anywhere 0.5 to two basis points tighter than their initial guidance.

But appetite for lower quality issuers, particu Gi??? and finance companies that make loans to borrowers with problem or spotty credit histories, has been untested until Thursday.

Despite data showing a growing number of Americans struggling to make debt payments, investors have not shied from consumer-related ABS, and have poured $21.5 billion into the primary ABS market so far this year.

The month-to-date supply has totaled nearly $21.5 billion, compared with a January record of $25.9 billion set in 2001, and the bulk of 2002 paper has come from top-credit issuers.

On Thursday, Onyx Acceptance Corp., a car finance company based in Foothill, Calif., priced $375 million ABS, supported by subprime car loans, and Option One Mortgage, a unit of H&R Block Inc. , sold a $643.5 million securitization of subprime home equity loans.

Spreads on both deals' AAA-rated notes were priced a basis point tighter than their initial guidance, and spreads on notes rated below AAA were priced five to 10 basis points narrower than their guidance.

Despite being backed riskier assets, the Onyx and Option One deals offer attractive yields and ample protection such as bond insurance for bondholders, Merrill's Castro said.

Looking ahead, Deutsche Banc Alex. Brown and Goldman Sachs will likely price a $614 million commercial mortgage-backed securities offering from General Motors Acceptance Corp's commercial real estate unit after launching it late Thursday.

Merrill Lynch will likely wrap up a $543 million deal, backed by home equity loans originated by Superior Federal Savings Bank, a failed Illinois thrift.