medium · Asset-Backed Securities abs-core
An analyst is comparing two Auto ABS tranches. Bond X is a $2.5-year WAL AAA priced at a Z-spread of +45 bp. Bond Y is a corporate bond with the same WAL and rating at a nominal spread of +40 bp.
Which statement best reflects the relative value analysis?
- Bond X is objectively safer because it is backed by thousands of diversified loans rather than a single corporate entity.
- The 5 bp pickup on Bond X compensates for its structural complexity and lower liquidity compared to the corporate bond.
- Bond Y is cheaper because corporate bonds always trade wider than structured finance due to lack of hard enhancement.
- The Z-spread and nominal spread are identical for Bond X because auto prepayments are not rate-sensitive.
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