Bonds Backed By Auto Loans Hit Multi-Year Highs

Bonds backed by auto loans are seeing an unprecedented rise in prices, the Financial Times (FT) reports.

The riskier triple-B groups are now trading with yields 0.7 percent higher than the Treasuries of similar maturities, according to J.P. Morgan.

The extra return on auto loans, which is a $220 billion market, has shrunk by 0.3 percent since its previous low in January 2020.

The yields for auto loans have fallen with a rally in the prices, but the interest rates being charged have only slightly declined. That’s because there’s currently a strong demand among consumers for cars.

The boost comes with stimulus checks buoying customers’ bank accounts, FT writes, and delinquencies and loans written off were both down in the fourth quarter by quite a lot, as opposed to the previous year, with Ally and other prime and near-prime auto lenders like Capital One, Wells Fargo and J.P. Morgan, FT writes.

Auto loans usually have a short lifespan of around three to five years, which means borrowers don’t usually refinance. In addition, the loans also represent smaller portions of a household’s income as opposed to other common forms.

FT writes that the average yield on an Ally loan comes out to under seven percent, while fixed 30-year mortgages are coming out to under three percent.

In November 2020, PYMNTS reported on the trend of consumers buying cars or financing auto loans online, saying it had disrupted the industry, though Patrick Roosenberg, director of automotive finance intelligence at J.D. Power, said this had already been in the works for some time.

Forty percent of borrowers said they preferred the online method to the old in-person ways involving dealers and banks haggling it out.

Banks also enjoy the new method, PYMNTS writes, finding it faster and more secure overall, along with the convenience of being able to receive applications any time of the day. Servicing and collecting loans also becomes easier, which will become particularly important as COVID-related loan deferments will soon start to expire.