A New Way of Understanding the Implications of Capital Markets Pricing

For years, we have monitored capital markets pricing with dedication. Each basis point matters. 

Or does it? 

It turns out that, yes, each basis point matters — or at least each 100 basis points, according to new research from JPMorgan Chase. 

According to JPM research released over the weekend, it turns out that each 100 basis points of higher auto loan rates on average increases monthly loan payments by $10. The correlation is both revealing and useful to understand.

Here’s how JPM put it (the write up followed at JPM capital markets conference held last month): 

In our opinion, the conference’s top fear factor was the recent rise in interest rates. Auto ABS and ensuing auto loan rates have risen by around 80 basis points YTD. These rates are being passed onto consumers who are predominately prime, high-income buyers who are relatively unaffected by the impact on monthly payments. For example, for every 100 basis point rise in auto loan rates, the average monthly loan payment rises by about $10.

JPM pointed out that auto ABS spreads are not the only aspect of pricing on the move, although it expects minimal repercussions from these changes.

In addition, both loans and lease monthly payments are contingent not only on rates, but also the state of consumer credit and residual values. Lenders have been able to offset higher rates through relaxed terms (loan duration, LTV) as delinquencies remain near cycle lows and used car values have remained strong. Due to saving and debt restructuring, the US consumer is becoming healthier as evidenced by the recent improvement in installment debt-to-disposable income ratio. Therefore, as long as the rise in rates is steady and accompanied by economic growth and recovery in the real estate sector, we expect minimal impact on automotive sales.

But, to me, the more interesting revelation comes from the bottom-line correlation between auto ABS pricing and the monthly auto loan payment for consumers. That’s because it is, in fact, true after all that each basis point counts.

We will be exploring capital markets trends at our Auto Finance Summit on Oct. 14-16 at the Bellagio Las Vegas during a special session guest-moderated by Elen Callahan, a Director at Deutsche Bank. Click here for details.