![There is an opportunity to find solid returns in asset-backed securities, even when headwinds arise](https://news7g.com/wp-content/uploads/2024/09/107408428-1714505358923-gettyimages-1982622954-237a7138-migliorato-nr-780x470.jpeg)
The headwinds are looming in the consumer space, which may have some investors wondering about the impact on asset-backed securities. The securitized products, known as ABSs, are backed by a pool of income-producing assets such as auto loans or credit card receivables. Investors have flocked to them because of their attractive yields. The ICE BofA U.S. Fixed Rate Asset-Backed Securities Index, which tracks the performance of U.S. investment-grade asset-backed securities, currently has a real yield of 5.12%, according to FactSet. Consumers are still spending money, with retail sales rising 1% in July from the previous month, according to Commerce Department data that are seasonally adjusted but not adjusted for inflation. But they are backing away from borrowing and are concerned about falling behind on payments, Piper Sandler said in a note on August 19. “The combination of 20%+ interest rates and large balances has finally caused consumers to withdraw, with revolving credit falling in two of the last three reported months,” the team led by chief global economist Nancy Lazar wrote. Revolving credit refers to credit card debt. However, the Federal Reserve Bank of New York reported that credit card balances increased by $27 trillion in the second quarter to $1.14 trillion — up 5.8% from the same period a year earlier. Meanwhile, the rate of delinquencies greater than 30 days has risen above pre-Covid levels for both credit cards and auto loans, Piper Sandler noted. While auto loan delinquencies remain concentrated in subprime loans, prime loan delinquencies are also higher than pre-Covid levels, the firm said. “Delinquencies will rise further as (inflation and) corporate earnings slow and the labor market loosens further, dampening wage growth,” the team wrote. A separate analysis by BTIG found that consumers remain under pressure. The savings rate fell 22 basis points to 8.2%, its lowest since June 2022, the firm said in a note Friday. A basis point is one-hundredth of a percentage point. But the story is a little more complicated, said John Kerschner, head of U.S. securitization products and portfolio manager at Janus Henderson. One of the funds he oversees is the Securitized Income ETF (JSI), which has about 41% of its portfolio in ABS as of Tuesday. The ETF has a 30-day SEC yield of 6.82%. He noted that the increase in delinquencies is not unexpected, given that they were at record lows during Covid and the economy has slowed a bit. However, investors in the sector are more narrowly focused than the overall consumer data, Kerschner said. For example, auto loans currently total $1.63 trillion, according to the New York Federal Reserve. However, he pointed out that the ABS market for auto loans is about $250 billion. “Of that $250 billion, about 60%, 65% are rated Triple-A, which unless you’re talking about … extremely bad situations, that should be fine,” he said. “The subset of things that investors are interested in is really small.” Still, Kerschner and his team have done the due diligence, making sure the underwriting is tight, the credit models are well-calibrated and their funding is sound. Right now, he said, the real issue is tight credit spreads, not delinquencies. Within ABS, he likes the equipment sector. “It’s a little bit narrower,” he said. “It’s not as well-known as some of the other issuers, but you can still find some good value there.” He also likes credit-linked bonds issued by banks. It’s a new sector, not as well-known, and it’s trading very cheaply, he said. One of JSI’s top holdings is Santander auto credit-linked bonds. Nick Travaglino, head of securitization at Nuveen, also believes there’s still plenty of opportunity in the ABS market. The firm’s Strategic Income Fund, managed by Travaglino, has a 14% allocation to asset-backed securities—the firm’s second-largest holding. The fund has a 30-day SEC yield of 6.48%. “You can get additional yield with a high-quality asset class,” he said. “Plus, the ABS market overall is poised to do quite well, even if the Fed starts cutting rates.” That’s because ABS issues typically have maturities of about five years, he said. There are also opportunities in consumer-focused paper within the ABS market, as well as securitized unsecured consumer loans, he noted. “The credit quality in the asset class that’s been securitized—it’s significantly better than it was two years ago,” Travaglino said. “Because they’re consolidating loan pools…the lower credit quality loans aren’t going to be included in the pool.” Shannon Saccocia, chief investment officer at NB Private Wealth, still believes ABS has a place in a portfolio, although she is being careful about her positioning. Her view since the start of the year has been that any defaults on fixed income are exceptional. So far, consumers have been thoughtful and discerning, she said. When it comes to choosing which bills to pay, they are likely to delay paying more discretionary bills — like their cell phones — rather than their cars, she said. “You need to continue to look at companies [and] Treasuries, but also securitized products because without this broader default cycle, there are opportunities in securitizations, which have been trading at wider spreads and require a keen eye,” said Saccocia. In the broader securitization market, her favorite position is mortgage-backed securities.