Deflationary forces, central bank policy measures, and ‘Brexit’ fears pushed sovereign bond yields to record lows. In the Eurozone, the 10-year Bund closed into negative territory for the first time. The market value of all bonds trading at negative rates now exceeds $8 Tn.
Here in the US, the 10-year bond has tightened to ~1.6% – levels not seen since May 2013.
Consumer lending rates, including mortgages, auto, and personal loans have also declined. The average 30-year fixed mortgage rate fell to 3.59%. According to Bankrate, rates on personal loans fell 7 bps from the prior week to 10.94% and are down 60 bps from their 2016 high.
Yields on marketplace lending bonds have also tightened substantially reflecting the strong demand for exposure to the unsecured consumer credit risk.
A Disconnect Between Capital Markets and Whole Loan Markets
Relative value traders serve as the arbitrageurs who force prices across related tradable fixed income assets in equilibrium. For instance, as Collateralized Loan Obligation (CLO) bonds in the secondary market are bid up, relative value traders will step in and buy high yield loans that are deemed cheaper, and, in turn, push the credit spread tighter. The forces of arbitrage also work in reverse; namely, as high yield loan prices gyrate downward, CLO bonds will be priced lower.
However, despite the tightening of MPL bonds and lowering of rates across the consumer lending space, originators in the marketplace lending market are bucking favorable interest rate tailwinds and are increasing rates to attract whole loan institutional investors. Pricing in the whole loan market remains segmented from pricing in the ABS bond market.
Distribution challenges ranging from the administrative hurdles associated with whole loans, limited warehousing infrastructure, lack of standardized reps and warrants, a lack of standardizing pricing and valuation tools, are some of the impediments to efficiently transferring risk to institutional investors.
Investors that can step in and transform pools of whole loans into tradeable ABS or CUSIPs stand to earn attractive economics due to dislocation between the two markets. Platforms and originators that can develop programs to efficiently distribute risk to whole loan and ABS investors can offer lower rates to borrowers and enjoy a competitive advantage.
- On June 27th, CEO Ram Ahluwalia, will have a fireside chat with students and Glenn Hubbard, Dean of Columbia Business School, former chair of Council of Economic Advisors and co-Chair of the Committee on Capital Markets Regulation.
- PeerIQ will speak at SCI’s 2nd Annual Marketplace Lending Securitisation Seminar on June 28 in New York.
- PeerIQ will speak on a panel at AltLend 2016 on July 13-14 in New York. PeerIQ guests will receive a 35% discount off of the standard rate. Email firstname.lastname@example.org with any inquiries.
- PeerIQ will be in Miami for the ABS East Conference September 16-18.
- JP Morgan, Goldman Eye Lending Club (AB Alert, 6/17/16) JP Morgan and Goldman Sachs considering a possible deal to purchase Lending Club.
- Testing the Market for Online Loans in Lending Club’s Wake (WSJ, 6/15/16) SoFi announces its first rated consumer loan deal and receives a preliminary “A” rating from Kroll rating agency.
- Current Spreads Reflect Risk in Marketplace Lending ABS: Wells (Bloomberg, 6/15/16) Current spread levels reflect increased sponsor and servicing risk in the marketplace lending sector.
- The U.S Online, Non-Bank Finance Landscape (Milken Institute, 6/13/16) Report on the evolution of non-bank finance companies.
- Europe’s Securitization Bankers Say They’re Stifled by New Rules (Bloomberg, 6/15/16) Bankers argue post-financial crisis regulation stifles the European ABS market.
- LendingClub Buys More Loans As Volumes Tick Up (WSJ, 6/15/16) Lending Club buys own loans as a temporary measure until funding base is rebuilt.
- China is the Biggest Market in Fintech–the World Just Doesn’t Know it Yet (LendAcademy, 6/16/16) China experiencing a surge in FinTech financings with companies such as Ant Financial, Lufax, and ZhongAn poised to go public over the next 18 months.
- P2P ABS Spreads Tightened Post-LendingClub Shakeup: PeerIQ (Bloomberg, 6/6/16) Existing P2P ABS investors are eager for more deals in the secondary market.
- Struggling Chinese P2P Lender Offers to Repay Investors with Baijiu (FT, 6/12/16) Cash strapped Chinese P2P lender to repay investors in baiju, a popular Chinese liquor.