As households are spending less and saving more, investors who bet U.S. consumers will keep paying their debts this year are seeing a windfall. This according to a recent article in The Wall Street Journal.
Bonds backed by consumer loans reportedly returned about 10% through October (data from Citigroup), making them the top-performing investments in 2020. “Prices for the so-called asset-backed securities have soared as consumers bucked expectations and responded to the coronavirus pandemic by paying down debt at a rapid clip,” the article notes.
In 2019, the article reports that household debt rose to a record $14 trillion as Americans “spent aggressively in a tight labor market, using personal loans to cover car and home repairs, credit-card consolidation and other expenses. When the coronavirus hit, lenders expected delinquencies to spike,” it added, but thanks to government assistance and reduced spending due to pandemic-related shutdowns, the expected increase in defaults never materialized. On the contrary, many households used the extra cash to pay down debt.
The article notes, “It is unclear whether consumer-loan payments will remain stable as months pass without additional government support.”