While more Americans than ever are behind on car payments, investors in bonds backed by auto loans haven’t flinched

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While more Americans than ever are behind on car payments, investors in bonds backed by auto loans haven’t flinched.

Prices of risky auto bonds have risen even as car loans that haven’t been paid in at least three months exceeded 7 million at the end of past year, the highest since the New York Federal Reserve began tracking the data two decades ago. As demand surged, the extra yield that investors get to hold the highest-rated debt, instead of what’s seen as a risk-free rate, has shrunk over the past month.

The tighter bond spreads are a sign investors remain confident that credit protections will continue to prevent losses in the subprime auto asset-backed securities market, as well as the fact that the rising late payments haven’t yet turned into a big increase in defaults.

Securitized debt makes up just a fraction of the overall auto-credit market, while the majority is kept on finance companies’ balance sheets. Only about 10 percent of the $437 billion of low-rated car loans have been turned into asset-backed securities, or ABS, according to Wells Fargo.

“ABS investors still feel pretty good on credit,” said Amy Sze, an analyst at JPMorgan Chase & Co. “Recent subprime auto new issues have priced well.”

The 60-day-plus delinquency rate for loans underlying subprime auto bonds has been steadily rising since 2011, but those missed payments haven’t translated into heavy losses for investors. The default rate edged higher to 5.5 percent in 2018 from 5.2 percent a year earlier, according to S&P.

Despite the stability of the bonds’ performance, observers are still wary of some trends in the market. Over the past three years, companies that offer loans to the riskiest borrowers tend to be the ones who use securitization the most. And at the same time, strong demand for higher yields has led to more lower-rated bonds in deals.

That’s a concern because there are fewer protections baked into the lower end of subprime ABS. So as a result, investors are starting to demand more robust credit protections than compared with a few years ago, eating away at already-thin profit margins at lenders struggling with deteriorating loan quality.