For the first time, “consumer bonds” this year are on a pace to outsell U.S. corporate bonds, according to a story in Tuesday?s Wall Street Journal. “It’s a watershed moment,” says Michael Wade, a managing director in charge of what are known as asset-backed securities at Barclays Capital. Sales this year through early September totaled $324 billion, compared with $306 billion in corporate bonds, according to Lehman Brothers. The shift is seen as a measure of consumers? importance in the current economy.
The rise in consumer-backed bonds is being fueled both by increased consumer borrowing and by the banks’ desire to transfer the risk of holding all that debt on their own books. “People are basically taking on more and more debt,” says Jim Sarni, a bond manager at investment firm Payden & Rygel in Los Angeles. “They’re leveraged to the hilt.”
According to the story, consumer-backed bonds are created by banks and other credit grantors by pooling together credit-card balances and home, car and student loans into securities that are sold to investors, who get the bulk of the interest consumers pay on those loans via the bonds’ yields.
Securities that are backed by American consumers now represent about 32% of the U.S. bond market, if mortgage-backed securities are included. That compares with 29% for U.S. government and agency debt and 20% for corporate debt, according to the Bond Market Association, a trade group.
For investors, the consumer-debt binge brings both opportunity and risk. Asset-backed securities — consumer bonds that don’t include lower-risk home mortgages — provide diversification to investors who already hold corporate and government bonds. Their prices can be less sensitive to interest-rate moves than other bonds because they often mature more quickly.
