Subprime auto loan borrowers are increasingly falling behind on payments, and the value of used cars is dropping, two trends that are clobbering bonds tied to the debt.
Yields on some of the riskiest such bonds have jumped to about 6.5 percentage points more than Treasuries as of last week, a risk premium that’s widened up about 2 percentage points from the end of September, according to data compiled by JPMorgan Chase & Co. Excluding a few weeks during the pandemic, current levels are the widest since 2010.
Subprime Widening
Spreads on lower-rated tranches of subprime ABS are widening fastest
Sellers of subprime auto bonds are bearing the brunt of investors’ increased skepticism. Southern Auto Finance Co. tried to sell an almost $120 million bond offering last month, in what would have been its first such offering, but delayed the deal citing market volatility. Some money managers say they are focusing on companies that have issued the bonds for years and may be safer, and also looking at safer securities within individual transactions.
“It is more prudent right now to play subprime auto from regular and higher quality issuers that have been through different economic cycles,” said David Goodson, head of securitized credit at Voya Investment Management, in an interview. “We remain defensive.”
There may be good reason to be defensive now. The current delinquency rate for subprime auto loan bonds has been rising this year, at 5.13% as of October, based on borrowers 61 days or more late, according to data from Fitch Ratings. That’s compared with 3.76% in the same month last year, when households were still flush with cash from pandemic stimulus. And used car prices have dropped about 15% this year according to the Manheim US Used Vehicle Value index, signaling that if times get more difficult and investors have to repossess these cars, the vehicles will be worth less and money managers could lose more.