Wall Street’s Enthusiasm Wanes for Bonds Backed by Risky Consumer Debt

Runaway inflation and a shaky economy are setting the stage for financial uncertainty, igniting fear in Wall Street investors that bonds and other investments backed by consumer debt might be weighed down by high risk. 

“When we’re investing, we’re investing less,” Clayton Triick, Angel Oak Capital Advisors portfolio manager told the Wall Street Journal on Tuesday (April 12). He added that investments backed by debt that is owed by borrowers with lower credit scores are especially troublesome.

When the COVID-19 pandemic gripped the world in 2020, investors were less than enthusiastic about bonds backed by consumer debt. The assumption was that defaults would be the rule rather than the exception as businesses locked down and people were furloughed and laid off.

Government stimulus programs and lender forbearance made many of those fears unfounded as even the most borderline borrowers stayed current. Many consumers used the extra funds to pay down debt beyond staying current, and anything leftover was squirreled away.

Related: Why Financially Worry-Free Consumers Still Want Alternative to Traditional Credit Cards

Consumer debt lost some of the black clouds of risk — however, an estimated $900 billion of loans to individuals that were packaged and sold to investors as bonds remained outstanding last year, the WSJ reported, citing data from Moody. Bonds issued that were backed by buy-now-pay-later (BNPL) installment loans, like those extended by Affirm and Upstart, hit $18 million, Finsight data showed, per the WSJ. 

Affirm yanked a $500 million bond backed by such loans in March following demands made by a big backer that wanted a higher interest rate, a hedge fund manager told the WSJ.

As investors unload bonds, yields are being driven up as prices are falling, with consumer debt yields escalating at a faster rate relative to the perceived higher risk. Yields for bonds backed by credit card and other consumer debt are also rising, according to the report. 

“We made the decision to hold off on issuing the refinancing transaction given the extreme pricing volatility due to heightened macro uncertainty,” a spokesman for Affirm told the Journal.