Investors seem more inclined to bet on the health of consumers now than the strength of companies, judging by bond market sales.
Fund managers are pouring money into asset-backed securities, bonds typically backed by bundles of consumer loans. US asset backed sales volume this year is about $235 billion, almost the same as this point in 2021, which was a post-crisis record year, according to data compiled by Bloomberg News.
In contrast, junk bond sales have plunged 78% to $87.95 billion, and leveraged loan issuance volume has dropped 73%. Even sales of investment-grade notes had fallen 13% through Wednesday.
It’s a dramatic turn from the financial crisis, when subprime mortgage bonds, and other securities tied to them, helped trigger market meltdowns that by one estimate cost the US economy as much as $14 trillion, chilling the structured finance markets for years. Now, there are relatively few mortgage bonds being made without government backing, and sales of bonds backed by areas like credit cards and auto loans are going strong.
Although the Federal Reserve’s efforts to get inflation under control by hiking rates will strain the economy broadly, consumers have relatively healthy balance sheets. Meanwhile, many kinds of companies have been boosting their leverage, in some cases for years.
“Consumer health is pretty strong,” said Lotfi Karoui, chief credit strategist at Goldman Sachs. “Cash is becoming a more attractive asset so investors are becoming pickier.”
In addition to being tied to relatively safe consumers, ABS are attractive for a few other reasons, investors said. They often mature in just a few years, making their prices less sensitive to changes in interest rates compared with, say, a 30-year corporate bond, while also reducing their relative credit risk. And they can be put together in a way that allows the underlying loans to sustain some losses before the safest asset-backeds see their cash flows hit.
“We are very comfortable with the underlying credit and structure in most consumer ABS deals,” said Nicholas Tripodes, senior portfolio manager at Federated Hermes, in a phone interview.
But investors are also demanding higher yields for asset backeds than they might for unsecured notes stemming from the same company, in a sign that money managers are still thinking about risk in the securities.
For example, John Deere sold asset backeds with a AAA rating at a yield of about 5.15% this month, with a weighted average life of 2.54 years. The company also priced $600 million of two-year unsecured notes with a yield of about 4.6%.