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ABA
November 22, 2019  

Late-Year Investor Maneuvers Lifting Values

Senior bonds backed by auto loans and credit-card receivables are rapidly gaining value on the secondary market.

The rally began around the end of October, as investors including asset managers and corporate treasury operations increasingly moved into the market. Their goal: to put any undeployed capital to work before closing their books for the year.

That annual process typically wraps up by mid-December. “It’s getting close to crunch time,” one trader said.

The values of floating-rate securities have fared especially well amid the heavier demand. That’s because investors have become more bullish on economic conditions, and thus see it as likely that interest rates will trend higher in 2020 — boosting returns on floaters.

Among bonds backed by prime-quality auto loans, triple-A-rated notes with two-year lives were trading this week at 36 bp over one-month Libor. That marks a 9 bp narrowing from the week ended Oct. 25, bringing the securities to their tightest spreads of the year. In the subprime auto-loan sector, similar notes moved in 3 bp to 47 bp over Libor.

Meanwhile, triple-A-rated credit-card securities with three-year lives were changing hands this week at 28 bp over Libor, a 17 bp narrowing from late October.

Spreads in both asset classes had been largely stable in the preceding months, as investors wavered on economic conditions. If anything, the thought was that some widening might occur due to a preference among many buyers for higher-yielding products such as bonds backed by whole-business cashflows and aircraft leases.

Credit-card securities, in particular, were seen as vulnerable to a decline in values.

So why are investors moving specifically into that asset class? Defying earlier predictions of an increase in dealflow, card lenders worldwide have trimmed their outputs of new asset-backed bonds this year to $24.6 billion from $36 billion a year ago, according to Asset-Backed Alert’s ABS Database.

That contraction, caused in part by a preference among large lenders to use their accounts as collateral for other financing mechanisms, is seen as likely to continue into 2020. For buysiders who want exposures to credit-card debt, that means it could be advantageous to build positions in the deals today.

In the auto-loan sector, demand has been boosted by a sentiment that economic growth could benefit asset performance. And the deals’ 2-3 year lives would have them coming due at a favorable time in light of a flattening yield curve. Prime-loan deals in that area have totaled $51.4 billion this year, versus $49.2 billion a year ago. Subprime-loan transactions total $30.3 billion, versus $32 billion.

In credit-card and auto-loan securitizations alike, investors see senior floaters as a safe place to park capital over yearend while simultaneously collecting stronger yields than those available through corporate bonds and benefiting from any interest-rate growth. In another encouraging sign, the secondary-market tightening has coincided with a robust supply of fresh auto-loan securities, with some $5 billion of notes slated to price this week.

“There simply isn’t enough new-issue paper to satisfy the demand. Investors are being forced into the secondary market,” another trader said.