U.S. households are starting to show increasing financial stress as outstanding consumer loan balances continue to rise. Although American consumers were able to withstand the economic difficulties of the pandemic, missed payments have increased for most types of debt. Many households took advantage of federal stimulus payments and forbearance programs for student loans and other debt to build up savings and paid down credit cards and other loans during the pandemic. Much of that has reversed course as consumers resumed more normal spending patterns, including travel and entertainment.
Today’s Chart of the Week highlights the change in newly delinquent payments (at least 30 days late) for various consumer loan debt. Aggregate delinquency rates were roughly flat in the second quarter of 2023. The overall delinquency rate remains low by historical levels at 3.18%; however, the share of debt that became delinquent last quarter is rising for most debt types, including credit cards and auto loans.1
Rising debt balances will likely present challenges for some borrowers. Total household debt balances increased by $16 billion in the second quarter of 2023, according to the New York Federal Reserve’s (Fed) Center for Microeconomic Data. Credit card balances saw the largest increase of $45 billion, the seventh consecutive quarter of year-over-year growth. Credit card balances recently surpassed the $1 trillion threshold in nominal terms for the first time in the series history. Americans owe $12 trillion on mortgages, $1.58 trillion on auto loans and $1.6 trillion on student loans.
Student loan delinquencies fell when the student debt relief plan was enacted in 2020. These loan payments have remained suspended, and interest rates were placed at 0%. Beginning next month, borrowers will resume payments on their federal student loans after more than three years. The end of the payment pause will likely lead to weaker performance for the overall student loan market and add additional financial strain for many student loan borrowers.
Along with rising debt balances, interest rates on consumer debt are also rising. Elevated interest rates have made consumer debt more expensive, putting pressure on household budgets. As persistent inflation has eroded household savings, U.S. consumers have increasingly turned to credit cards to manage expenses, leading to ballooning credit card balances and exacerbating an already stressful consumer environment.
Key Takeaway
Credit performance on consumer debt is likely to deteriorate as consumers exhaust their savings. Household leverage has steadily risen from pandemic lows as borrowers draw down excess savings and rely on credit cards to fund the gaps. Collateral performance will likely weaken for more credit-sensitive asset types such as subprime auto and consumer loan asset-backed securities (ABS). Student loan delinquencies are expected to rise with the resumption of student loan payments, putting pressure on household finances as borrowers prioritize loan payments.
While the consumer still faces challenges, spreads on some securitized consumer loans look attractive. Asset-backed securitizations benefit from short deleveraging structures and solid credit enhancement levels which have improved since the great financial crisis. I prefer shorter-duration high-quality paper tied to prime borrowers. Wider spreads and higher all-in yields are attractive at the top of the capital stack.
Source:
1Federal Reserve Bank of New York – Center for Microeconomic Data; August 2023
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.
