In the subprime mortgage crisis, there were credit derivatives that investors could use to bet against an index of bonds backed by the home loans, but no such derivatives exist now for bonds backed by auto loans, said John McElravey, an ABS analyst at Wells Fargo. Inventing such a product is hard because few money managers want to use derivatives to bet that these securities will perform well -- they would rather just buy the bonds outright.
In other words, even if some customers want to bet against bonds with derivatives, few are interested in using these instruments to wager that the underlying securities will perform just fine, McElravey said. He is telling clients that betting against auto ABS is "a terrible idea."
Still, investors are expressing interest in the idea, said Don McConnell, a senior portfolio manager at BMO Global Asset Management in Chicago, who helps manage $15 billion of taxable bonds.
"Some guys over beers have asked to do these trades," McConnell said. "It’s a very interesting concept."