11 Jun Market Insight – Subprime Auto: Frightening Parallels to the Mortgage Crisis, but is there Systemic Risk?
By Voya Investment Management
The headlines surrounding subprime auto lending have been negative in recent years, extremely so at times. For investors in securitised credit, this year’s broader slowdown in the overall auto industry has exacerbated concerns about the long standing problems outlined in these headlines. Tangentially related concerns stemming from student lending dynamics seem to have also registered more in the active conscience of market participants.
And with good reason – weakening industry dynamics can negatively impact collateral valuations, catalysing an increase in borrower defaults. This pushes up the cost of credit and negatively impacts the macro-economic backdrop, which in turn reinforces the dynamic.
Does this vicious cycle sound familiar? The credit crisis – while an increasingly distant memory – offers risk takers a supremely poignant example of how bursting bubbles in seemingly isolated markets can spiral into a calamity of global proportions.