Greed and recklessness continue to govern the markets; nothing was learned from the 2008 financial crisis. Hence, history is destined to repeat itself and this might occur a lot faster than most anticipate. Fitch states that Subprime Auto bond delinquencies are at a 20 year high.
The number of individuals who are more than 60 days late on their auto payments surged 11.6% year over year; this brings the current delinquency rate to 5.16%. During the financial crisis of 2008, the delinquency rate peaked off at 5.04% according to fitch. This data only serves to confirm the point we have been driving all this time; this entire economic recovery is nothing but an illusion. The illusion is supported by hot money; take away the money and the illusion vanishes. This is why the Fed is hell bent on lowering rates and this is why it has pushed central bankers into a corner forcing them to embrace negative rates. This sort of creates the impression that we held off till the end , but this was the game plan all along. Lower rates mean more hot money will flow into the markets as companies borrow even larger sums to buy back their shares, to further enhance the illusion that all is well. By buying back their shares, they can raise the EPS without actually improving efficiency or selling more products; a perfect scam with a very high payout and almost no risk.
“This isn’t an issue of whether the bonds will be repaid in full,” Kevin Duignan, global head of Fitch’s securitization group, said in an interview. Rather, it’s a question of whether investors will be faced with uncertainty that is inconsistent with high investment-grade ratings, he said.
“Our concern isn’t necessarily individual transaction performance, but how a group of mid-sized and smaller issuers could be exposed to funding risk at the same time, and which results in unanticipated consequences for investors,” Duignan said. “You could see a vicious cycle” where investors stop buying from smaller companies, which would then be forced to cut back on their servicing costs, resulting in even more loan losses, he said.
In General, investors expect some sort of trouble and they understand the risk is high and that is why they gravitate towards these investments because of the higher yield. However, the outlook changes when you actually have to take a loss. It is one thing to anticipate one and quite a different issue to having to deal with one. If delinquencies start to surge investors could suddenly head for the exits leaving this market with no buyers. As they say, it’s always quiet before the storm. If you have invested in this sector then it would be best to hedge yourself by purchasing some puts; in other words, short the auto loan sector
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