The bubble may be stretched to the breaking point.
According to the latest Experian data, monthly payments for new- and used-vehicle loans hit record highs during the second quarter.
Average new-vehicle payments increased 4.0 percent (about $20) year-over-year to $525, while used-vehicle payments rose 3.6 percent (about $13) from the year earlier, to $378, Experian said in its State of the Automotive Finance Market report.
To put that $525 figure in perspective, that sum had the same buying power as $4,240 back in 1965 – when the average new cars cost about $2,650 . . . for the whole car. And that $2,650 in 1965 money is equivalent to just over $21k today.
But today, the average new car sells for about $35k – which is why monthly payments are at record highs.
To understand why they will go still higher – and why that is inevitably going to lead to most people renting ride-shares rather than owning and driving their own cars, see here.
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What Does This Mean for Investors in Investment-Grade Debt?
From an overall portfolio-construction perspective, we firmly believe that investment grade bonds ultimately need to serve as ballast so that they could potentially hold value during periods of volatility. Given our view of modest return potential—and our realization that the highly favorable credit conditions will not last—we believe that now is not the time to overreach for incremental yield in riskier components of the credit markets. Aside from generally avoiding higher beta3 sectors like emerging-markets, “deep” high yield (i.e., bonds rated B or below) and collateralized loan obligations (CLOs), we have actually de-risked our portfolios to reflect growing downside risks as this credit cycle progressed. We look to maintain our more modest overweight and are unlikely to add to our risk exposure absent materially wider spreads.
The party is about to come to a screeching halt. Probably on November 7th. Better get your ducks in a row.