Credit Insight: Trends in Asset Backed Securities

In this IFM Credit Insight, we talk to Andrew Beales from our Debt Investments Team about how the current trend towards monetary policy tightening and rising interest rates is impacting asset backed securities (ABS) markets.

Since ABS are usually backed by consumer loans, it is important to monitor any changes in economic conditions that might impact household balance sheets and borrowers’ abilities to make loan repayments. At present, this includes monetary policy tightening, significant price inflation and downward pressure on real incomes.

However, there are several mitigating factors that suggest the impact of rising interest rates on ABS may be less than the market is expecting. This includes the record low unemployment rate, improved household liquidity buffers and the asset inflation evidenced during the pandemic for both housing and cars.

Looking forward, despite inflation and rising interest rates, we believe that seasoned consumer loans with established payment histories and larger liquidity buffers will likely continue to perform well in the current environment, particularly as the unemployment rate remains low. But we do expect a more cautious approach from investors in the market, with greater loss protections required in transactions and wider pricing for a given level of risk.