Truist Sees ABS Sales Climbing 15% This Year as Spreads Narrow

Truist Securities forecasts asset-backed securities issuance will rise as much as 15% this year and up to 10% next year as credit spreads tighten. Narrower risk premiums are improving borrowing terms for ABS issuers, indicating supportive conditions in securitized credit markets.

Analysis

Tighter ABS spreads are primarily a funding-cost and credit-availability signal, not simply a fixed-income technical. The first beneficiaries should be non-bank originators and specialty-finance platforms whose growth is constrained by warehouse capacity and securitization execution: COOP, OMF, ALLY, SYF and CACC. Lower takeout yields can expand gain-on-sale economics, permit more competitive borrower APRs, and reduce the probability that lenders pull back on originations; the benefit should emerge in 1-3 quarters rather than immediately in reported earnings.

The important second-order risk is that improving securitization economics can prolong aggressive underwriting late in the consumer-credit cycle. Auto and unsecured consumer ABS spreads may tighten faster than underlying delinquency trends justify, particularly for subprime collateral; that would favor originators initially but create 6-18 month residual-value, repurchase and charge-off risk. Credit-card lenders such as COF and DFS benefit from better funding alternatives, but their larger earnings sensitivity remains net charge-offs and reserve builds rather than ABS execution.

Consensus may over-interpret spread tightening as a clean all-clear for consumer credit. ABS demand can be driven by bank balance-sheet constraints, insurer demand and relative-value flows versus corporates even while household stress worsens. The thesis is falsified if monthly delinquency/roll-rate data re-accelerate, used-car values weaken materially, or benchmark rates rise enough to offset spread compression; in that case securitization windows can remain open while equity multiples compress on future credit losses.

Key Decisions for Investors

• Build a 1-3 month tactical long basket in COOP and OMF versus short KRE: specialty lenders have more direct upside from improved capital-markets access, while regional banks retain greater CRE and deposit-cost sensitivity. Target 10-15% relative return; exit if unsecured ABS spreads widen more than 50bp or management cuts origination guidance.
• Prefer ALLY over CACC on a 6-12 month horizon: both benefit from functioning auto-ABS markets, but ALLY has a more diversified earnings base and less sensitivity to subprime used-car residual values. Use a 2:1 upside/downside framework; reassess if Manheim used-vehicle pricing declines more than 5% sequentially or auto delinquencies inflect upward.
• Do not chase broad consumer-finance beta solely on this signal. Establish an alert for subprime auto ABS spread tightening without parallel stabilization in 60+ day delinquencies; that divergence would be a setup to short CACC or buy downside protection in KIE over the following 6-18 months.
• For credit exposure, favor higher-quality floating-rate consumer ABS over similarly rated unsecured corporates only while the spread advantage persists and collateral performance is stable. Re-evaluate after each monthly remittance cycle rather than treating issuance volume as proof of improving borrower fundamentals.