Investment manager Gryphon Capital Investments has sounded a note of caution about the current buoyant conditions in the Australian securitisation market, where a large volume of issuance so far this year has been met with such strong demand that spreads have narrowed sharply.

The Gryphon Capital Investment Trust has a A$622 million portfolio of residential mortgage-backed securities and asset-backed securities.

Its latest investment update said: “Despite the highest new issue supply since 2007, it has proven to be insufficient to satisfy the insatiable demand from domestic and international investors, resulting in a ferocious spread rally across the capital structure, particularly in the mezzanine tranches.”

Gryphon said a soft landing scenario is now the base case for investors, triggering increased demand for high quality risk-adjusted yield.

Gryphon said: “Given how quickly new issues are being oversubscribed, our read is that there seems to be little to no discernment being expressed by investors who may be buying deep mezzanine classes purely based on credit rating and total yield, effectively outsourcing their credit underwriting to the ratings agencies.

“We have seen this behaviour before and it rarely ends well.”

It said that in the current market it is being more selective about new public issues. It is deploying more of its capital in privately negotiated RMBS and ABS transactions, and it is sourcing seasoned secondary market positions.

Public issuance of RMBS, ABS and CMBS exceeded $50 billion last year, setting a post-GFC record, and the market has continued on in the same vein this year. Margins on the senior notes of non-bank issues have come in by more than 20 basis points since the start of the year and issuers who stayed out of the market last year are back.