Car sales are lower than you think. Here’s why that’s great news for auto-backed bond traders
New car sales have been booming in Britain recently, but Moody’s points out that sales are not as high as they have been – and that’s good news for anyone who fancies buying into auto-backed securities.
While sales of new vehicles rose 10.8 per cent last year, the market remains just below the 15-year average. This, combined with the 2010 scrappage scheme, is pushing up the value of used cars as long as Brits keep buying.
Demand will stay high for used cars as PPI compensation keeps fuelling deposit payments and overall credit supply continues to increase, Moody’s adds.
When it comes to auto-backed bonds, this rise in prices means the used vehicles are covering a bigger portion of the bond value if the buyer defaults on the loan used to buy the car.
It also means that customers are less likely to default in the first place, thanks to rules that allow buyers to hand back the car once they have paid off more than 50 per cent of the loan – an option that looks less appealing if the car is worth more than the outstanding value of the contract.
Car debts accounted for $97bn of the $258bn in US bonds tied to consumer and business lending issued in 2012, according to Bloomberg. Banks and car companies with loan businesses tend to be the biggest sellers.
UK auto-backed securities are a more niche investment. JP Morgan put last year’s issuance at around €5.6bn, broadly flat on 2012 levels and compared to a total of €28.7bn-worth of asset-backed securities issued in Britain overall.