The Money Spreads To Other Markets: Subprime Auto Asset-Based Securities

by: John M. Mason

And, the beat goes on. The money deluge created by the Federal Reserve continues to spread. Sectors of the investment market that have been avoided since the financial collapse have been recovering as money has flowed from one market, thought "dead", to another, as investors seek higher yields.

Now we read that the sales of subprime auto asset-backed securities have risen, year-to-date, to nearly $4 billion. This is almost twice the volume of 2012 in the same time period.

The Financial Times reports that "Subprime auto sales now account for 34 percent of all auto ABS issuance, surpassing levels last seen in 2007."

The reason for this resurgence? The better economy; the "ultra-low" rate environment; and the "ongoing search for yield."

And, auto sales are doing pretty well.

Thus, the flow of money throughout the economy spreads. More and more, funds are moving out into spaces in the financial market that were deemed excessively risky … at another time.

The risk of these assets?

Well, they are "subprime"!

"The securities' popularity has yet to reach levels that point to the looser underwriting standards that were common ahead of the financial crisis."

The use of financially innovative securities continues to grow in the current environment. The Federal Reserve must be very happy!

The spread of CLOs and CDOs, as well as other xxx's, is pointing to the increasing velocity of Federal Reserve generated money in the financial sector.

The impact is that auto sales are doing pretty well. The housing sector is improving. And, there seems to be a growing superabundance of capital.

The evidence of this abundance is that yield spreads have been falling in many of these markets. For example, the Financial Times reports that "Barclays ABS (auto) index shows spreads tightening to 0.49 basis points over similar swaps, compared with 0.83 basis points a year ago, and other ABS asset classes have shown similar tightening as buyers pile in."

The question to ask here concerns the timing of a financial move.

People are already asking whether or not it is too late to get into the housing rebound?

Credit bubbles are like this. Early in the buying cycle is good. Too early is not so good. Too late is very bad.

But, investors need yield now. They are looking just about anywhere for yield. So we get into subprime auto asset-backed securities?

The investor seeking for returns needs to comb the "cemetery" for other candidates. Securities backed credit-card debt? Securities backed by student loans? Subprime mortgages? Well, why not?

This must be what the Federal Reserve is hoping for. The money is spreading out throughout the financial markets…and some of it is finding its way into productive activities. Not much, but even a little bit seems to be encouraging for the Fed. Credit bubbles are harmless? Aren't they?

And, note what the Financial Times goes on to say…"Rising used car values, which boost recovery rates on defaulted debt and ease losses for bondholders, have also helped lift subprime auto debt recently."

Does this sound like a robust economic recovery?

In the market for subprime auto asset-based securities we have a play for yield. It is a place to earn a higher yield on your assets. But, don't be late … and, by all means, be nimble and get out when you can.

Is this another round of the Chuck Prince, the former Chairman and CEO of Citigroup, dance? The getting is good while the music is playing. Just be able to get off the dance floor when the music stops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.