US debt markets showing signs of improved health

A sign of a return to health in one of the more damaged parts of the financial markets is expected to be revealed on Thursday.

Data due to be released is forecast to show that investors have been buying a growing number of securities backed by credit-card and car loans without help from the US Federal Reserve.

Each month, the Federal Reserve offers cheap funding to investors to buy securities backed by consumer loans – with deals sold by the likes of American Express, Bank of America, Nissan Motor and Ford Motor.

September’s round of funding is likely to see a smaller proportion of buying financed by Fed loans than in other months since the markets seized up a year ago.

“For credit-card and auto-loan deals, we expect 50 per cent could be bought directly by investors, without resorting to Fed loans,” said Don Ross, global strategist at Boyd Watterson Asset Management, which buys securities with Fed funds. “In some ways, that means the Fed can declare victory, because those parts of the markets are now working without their help.”

The precise breakdown of buyers will be revealed on Thursday, when the Fed will detail the number of requests for cheap loans under its $1,000bn term asset-backed securities loan facility (Talf).

About $12bn of asset-backed securities which are potentially eligible for Fed funding are expected to have been sold.

Following the panic that seized financial markets across the globe after the bankruptcy of Lehman Brothers, it became impossible for new financing to be raised through the sale of asset-backed bonds, for years one of the biggest sources of financing for the credit market.

Consumer asset-backed securities are now in better shape, with funding costs coming down. Other areas such as commercial mortgage-backed securities have not recovered as much and the Fed continues to try to improve their functioning by lending investors money to buy such securities too.

According to research by Deutsche Bank, the Federal Reserve financed 80 per cent of the $555m of securities backed by auto loans made in August, and 80 per cent of the $2,575m of credit-card backed loans.

The lifespan of the Talf was recently extended. Cheap loans are now expected to be available until March 2010.

Source: Financial Times.

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