Here is yet another interesting story on the spreading impact of wider spreads — this time focused on the spreadbetween yields on vehicle-loan Asset Backed Securities over Treasuries. From Bloomberg:
“Wider spreads on auto-loan securities may make it harder for the financing arms of Ford Motor Co., General MotorsCorp. and Chrysler LLC to compete with banks for new business.
“Yields over benchmark rates on auto-loan debt from the automakers’ lending units has soared to record highs, with thespread on AAA rated bonds maturing in three years climbing 35 basis points last week to 240 basis points more than theswap rate, according to Lehman Brothers Holdings Inc. The swap rate, a borrowing benchmark, is set at 3.7 percent. Abasis point is 0.01 percentage point.
“Historically, tight spreads in the ABS market have allowed the auto manufacturers to offer attractive financing toboth boost auto sales and compete with bank lending at a relatively low cost,”‘ Lehman analysts Brian Zola and SandipanDeb in New York wrote in an Aug. 22 report. “That is no longer the case.
“The higher cost to sell debt in the asset-backed market makes it more expensive for lenders to fund new loans,squeezing auto companies already struggling with slower sales as consumers battered by record gasoline prices abandonthe fuel-thirsty trucks that provided most of U.S. companies’ profit. U.S. auto sales tumbled 13 percent in July,pushing the industry toward its worst year since 1993.
“Captive auto finance companies, needing to make up for the higher spreads the companies have to pay to raise money,may end up issuing loans to riskier borrowers who would pay higher interest rates, the Lehman analysts wrote.”
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On auto loans. We have the cash in hand before a purchase of an automobile. And this is an infrequent event. As retirees for almost fifteen years now, we don’t drive as much as when we commuted. And when weather permitted we use bikes. Conditioning and transport all in one.
Bikes are not without risks!!! My wife broke her leg when wet leaves sent the bike one way and her torso another last November. Her recovery is progressing, but is a risk we have taken for many decades. This is the first serious event in tens of thousand miles in the saddle.
With zero debt and a significant portfolio (somewhat battered in last few months) we are not suffering in our retirement.