Auto-loan delinquencies may have approached crisis-era levels recently, but that hasn’t put the brakes on demand for riskier slices of subprime auto-loan bond deals.
New subprime auto bonds with “junk” BB-ratings
Demand has been so strong for low-rated subprime auto bonds that some investors now feel crowded out.
“Coming into this year, there’s been more cash chasing
“This is one area that pricing has tightened in,” he told MarketWatch. “And now that yields reside
Bond yields move in the opposite direction of prices. Investors across fixed-income markets have been on the prowl for higher returns at a time when 10-year Greek government bond yields TMBMKGR-10Y, +0.07% have plunged below 1%, 10-year U.S. Treasury note yields TMUBMUSD10Y, +0.28% trade near 1.56% and the cost of U.S.
This chart from Deutsche Bank research tracks investment-grade bond yields since 1986.
Auto loan bonds differ from corporate or sovereign borrowings since their performance hinges directly on the ability of consumers to repay their debts, rather than a business or government.
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Consumers have benefited from a robust labor market, with the unemployment rate hovering near a 50-year low of 3.5%, while income gains have outpaced debt growth, a combination that should bode well for auto lenders, according to a Morningstar DBRS outlook published Wednesday.
But the credit-rating agency also warned that under a recession scenario,
When Flagship Credit Acceptance sold its $355 million subprime auto-loan bond deal in early February, it pooled loans with a weighted average interest rate of 16.09% and average borrower FICO scores of 587, according to
Experian, one of the main U.S.
Bond-market investors typically earn higher yields when they buy lower-rated securities that come with higher risks of losses. Investors have been betting on U.S.
Federal Reserve officials gave bullish investors more reason to think a recession isn’t in the cards just yet, after the release Wednesday of minutes of the rate-setting Federal Open Market Committee’s January meeting, which signaled that the U.S.
The minutes also suggested the central bank may be more inclined to ease rates than to raise them in the near term, which helped propel major U.S. equity benchmarks higher Wednesday, including the S&P 500 index SPX, +0.47% and Nasdaq Composite COMP, +0.87% , which scored record finishes.
But even with a favorable economic backdrop, recent data on U.S.
The Federal Reserve Bank of New York said that 4.9% of the record $1.33 trillion pile of U.S.
That translates to roughly $65 billion of seriously past-due auto loans, a record when factoring in the significant growth of auto financing since the 2007-’08 financial crisis, per Fed data.
So why have investors been chasing the subprime auto-bond rally? For one thing, auto bonds are structured
This week, Moody’s underscored the point in a new report showing it downgraded