Tailwinds helping the ABS market

The auto-related asset-backed securities (ABS) market, notably loans and leases, is thriving amid high used car prices and low unemployment. This environment reduces risks for investors as elevated vehicle values mitigate potential losses from borrower defaults. Lease agreements benefit particularly, with strong residual values lessening concerns over contract value discrepancies upon lease return. However, the distinction between prime and subprime borrowers is becoming more pronounced; while prime borrowers continue to perform well, subprime markets are experiencing increased delinquencies due to inflation and rising interest rates.

Despite these challenges, the robust labor market has kept subprime performance contained for now. Investors may find opportunities by focusing on prime credit card ABS deals where gross yields are favorable and charge-offs remain low—some of the best metrics seen in decades. Overall, while caution is warranted in certain segments like subprime personal loans and credit cards if economic conditions worsen further for lower-end consumers, structured tranches within ABS can help buffer against significant downturns in collateral performance.