(Bloomberg) -- 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%.
And not every company is finding the asset backed market open to them when they want to borrow. Southern Auto Finance Co. this month delayed its first sale of bonds backed by subprime car loans, and used car dealer DriveTime Automotive Group Inc. paused the sale of over $350 million of bonds backed by subprime auto loans in late September.
Even so, companies that can borrow in either the unsecured or ABS markets are often choosing to securitized debt because it's more reliably open for business now, said Emile Ernandez, managing director at Florida-based asset manager Kawa Capital, which invests in ABS.
"Given the volatility right now it doesn't surprise me that if you have a choice between the two, you'll pick securitized," Ernandez said.
Asset backed notes have weakened this year, but they've been hit less hard than other kinds of debt. The Bloomberg index of the securities was down 5.6% through Thursday, compared with a nearly 20% drop for investment-grade corporate bonds. Junk bonds fell 14.6% over that period.
Consumer Health
Part of the appeal of asset-backeds is that households these days are in relatively good financial shape, with the ratio of household debt payments to total disposable income having fallen sharply over the last 15 years. During the pandemic, stimulus checks helped many families pay down debt. For auto loans and the bonds that package them, that's helped drive delinquency rates to historic lows during the pandemic.
Still, some investors worry about rising risks as the Fed tightens rates. Consumer debt performance is often tied to unemploment, which may rise as higher rates cut into economic growth.
Auto delinquency rates rose in August, with losses for subprime auto debt nearing pre-pandemic levels, according to S&P Global Ratings. Cathie Wood, founder of Ark Investment Management LLC, recently warned that auto debt could face the risk of "serious losses" because of declining prices in the used car market, which reduces the value of autos that get repossessed after borrowers default. She said the shift IN consumer taste toward electric cars may further cut into used car prices.
Nevertheless, as bonds broadly suffer, many investors see asset-backeds as offering good yields given the potential downsides.
"You don't need to buy risky stuff anymore," said Tracy Chen, portfolio manager at Brandywine Global Investment Management.
Elsewhere in credit markets:
Americas
US high-yield funds bled $712.6 million of cash during the week ended Oct. 12, according to Refinitiv Lipper, a reversal from last week's intake of $1.87 billion. That was the biggest influx since August.
- Kroger Co. has lined up a $17.4 billion fully committed bridge loan from Citigroup Inc. and Wells Fargo Co. to help fund its acquisition of Albertsons, according to a release Friday
- Banks could be about to deluge the market with more bonds after they post quarterly results, borrowing at a breakneck pace even as other blue-chip companies pull back, and bondholders could suffer in the process
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
Europe
No new deals were announced in Europe's primary market on Friday. Fedrigoni SpA's upsized euro high-yield bond offered price talk.
- Emerging market governments that borrowed heavily in dollars when interest rates were low are now facing a surge in refinancing costs, evoking flashbacks to Asia's 1990s debt crisis and stoking fears of a default wave
- UK bonds are making more reversals than the government these days
- Nigeria's Eurobond holders will not be included in a plan to extend the tenors of its outstanding debts and not necessarily "restructure" its obligations, the West African nation's finance minister said
- KKR & Co., the pioneer of buyouts powered by leverage, is again facing the test of doing one without the other
Asia
Asia's primary dollar bond market recorded its worst week since mid-August, as investment-grade yields extended their climb. Bond sales totaled $264m vs $2.1b the previous week, according to Bloomberg-compiled data.
- Two of the world's top credit rating firms are fast exiting the business of assessing Chinese developers, citing inadequate information from the companies as the sector's debt crisis intensifies
- Foreign companies including a handful from South Korea are turning to yen notes as investors seek to diversify into markets with lower volatility amid turbulence in global bonds
(Updates with withdrawns ABS deals from paragraph 11)
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