Discounted asset-backed securities tied to government-guaranteed student loans could benefit from defaults, according to Citigroup Inc. (C:US)
Defaults trigger government prepayments of loans taken out through the Federal Family Education Loan Program and could increase if the economic situation remains uncertain, Citigroup analysts said in a report today. The acceleration of early payments will reduce the weighted average life of the debt.
“Given currently low voluntary prepayments, defaults are a major component of prepayment speeds,” according to the New York-based analysts led by Mary Kane.
Relative yields on the government-guaranteed debt range from 30 basis points to 105 basis points more than the London interbank offered rate, according to Citigroup. Doubling the current default rate would increase the spread by four basis points to 24 basis points, according to Citigroup.
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