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By Bloomberg

The boom in U.S. auto sales is transforming the market for asset-backed securities into one dominated by bonds tied to car loans.

Sales of the debt will increase about $20 billion to $120 billion next year as the rest of the market, which includes securities tied to credit-card payments and student loans, remains stagnant, according to Citigroup Inc. That will boost the proportion of auto-linked offerings to 54 percent of the $224 billion in total issuance, from just under half this year.

The auto industry has become the main catalyst for deals in the asset-backed bond market as U.S. vehicle demand rebounds from the financial crisis to post the longest streak of sales gains since World War II. While demand has been fueled partly by loans to the least creditworthy car buyers, investors are buying the relatively short-term securities as the U.S. economy expands at the fastest pace in a decade.

“It’s a safe place to hang out,” David Schawel, a money manager at Square 1 Bank, said from Durham, North Carolina. “People are comfortable enough with the trajectory of the economy where they aren’t too concerned with the underlying credit.”

No Losses

Auto-backed securities with AAA ratings and fixed coupons haven’t had a losing year in Bank of America Merrill Lynch index data going back to 1992. This year, they’re up 0.72 percent, which is 0.37 percentage point more than comparably dated Treasuries.

Investors have turned to the debt as other parts of the market contract. Changes to the federally guaranteed student- loan program have knocked out private companies from that business, while banks are using deposits to fund credit-card lines after accounting rules implemented in 2010 made securitization more costly.

For securities linked to home loans that aren’t guaranteed by the U.S. government, issuance has all but dried up. Just $8 billion was sold this year, compared with a record $1.2 trillion in each of 2005 and 2006, before the housing bubble burst, Bloomberg data show.

Bonds linked to credit card payments accounted for about $45 billion of issuance, while $15 billion of securities were backed by student loans, Citigroup analysts wrote in an asset- backed industry outlook dated Oct. 9. The share of each is expected to be largely unchanged in 2015.

Subprime Borrowers

The U.S. auto industry, meanwhile, is poised for a sixth consecutive year of sales growth. Deliveries of new cars and light trucks in 2015 will probably total 16.9 million, according to a forecast from the National Automobile Dealers Association. That would be the most since 2005.

As auto sales rise, people with poor credit are accounting for an increasing share of purchases.

That’s fueled a surge in issuance of bonds tied to auto loans for subprime borrowers as the Federal Reserve’s six-year- long policy of holding its benchmark interest rate close to zero pushes more investors into riskier assets.

Sales of the debt reached $21.4 billion on Nov. 26, more than the $21 billion in all of 2013, according to data compiled by JPMorgan Chase & Co. In 2012, there were $18 billion of sales.

The subprime-auto business is flourishing after private- equity firms invested in it over the past three years, raising concern that underwriting standards are deteriorating as new entrants rush to offer more loans.

‘Safe Investment’

The growth rate is not sustainable and the prior period of expansion in the industry ended with lenders failing and consolidating, according to the Citigroup report.

Mary Kane, who led the team that wrote the report, declined to comment yesterday.

The U.S. Department of Justice is seeking documents from the largest subprime auto lenders relating to their underwriting and securitization practices.

Losses on car loans to subprime borrowers contained in asset-backed securities reached 7.96 percent last month, the highest in more than four years, according to Fitch Ratings. Losses on loans to borrowers with good credit are at 0.47 percent, the rating company said in a Dec. 18 report.

Investors will be keep buying auto asset-backed securities in 2015 as the economic backdrop improves, according to Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union.

Auto-backed debt “has done well because it’s of shorter duration and high quality,” he said by telephone. “Investors like auto ABS because it’s a short, secure safe investment.”