and

Updated Nov. 19, 2024 at 8:22 am ET

Delinquencies on auto loans have been creeping up since the economy began reopening after the pandemic. Photo: David Paul Morris/Bloomberg News

More Americans are falling behind on their car payments. Wall Street isn’t worried.

Investors are snapping up bonds tied to car loans, betting that a strong U.S. economy will keep rising delinquency rates in check. Sales of bonds backed by the riskiest auto loans to subprime borrowers hit nearly $40 billion this year through October, up 17% from all of 2023, according to data from JPMorgan Chase.

“We’ve seen deals almost 20 times oversubscribed,” said Nicholas Tripodes, a senior portfolio manager at investment firm Federated Hermes. This level of interest shows how strong demand has been among investors for such debt.

Bonds of all kinds have surged in popularity over the past year, with investors rushing to take advantage of interest rates while they remain high. Demand is also being fueled by money managers that have teamed up with insurers, which have piles of cash from annuities and insurance premiums to invest.

Auto bonds from Global Lending Services with the lowest investment-grade rating yielded about 6% in October. That is roughly triple what comparable debt backed by subprime auto loans yielded in 2021, according to data provider Finsight.

Like other asset-backed securities, auto bonds are split into levels, or tranches, and are made up of pools of thousands of loans. Investors in the highest tranches get priority on payments, enabling the bonds to get investment-grade ratings even when they are backed by subprime loans.

If too many borrowers default on their loans, the first to get hit are investors in the lowest tranches. Those are often hedge funds and other investors looking for higher returns.

Delinquencies on auto loans have been creeping up since the economy began reopening after the pandemic, hitting 3.8% in June. That was the highest level since 2010, according to data from the Federal Reserve, which measures payments that are at least 30 days past due.

The stress is concentrated among borrowers with lower incomes and credit scores who have been pressured by higher living and borrowing costs, investors and analysts say. But they don’t expect the troubles to spread—if the economy holds up. People also tend to give priority to their car payments over other bills.

That is the case for Raymond Guerriero, a 60-year-old resident of Hawthorne, N.Y., who filed for bankruptcy last year and pays about $700 a month for his car, including nearly $300 for insurance.

“I’m not going to be Ubering and asking people for rides because I can’t afford it,” said Guerriero, who delivers car parts to auto-body and mechanic shops.

Auto bonds typically pay fixed interest rates, so when rising demand pushes up prices, yields on the investments go down. The extra yield above Treasurys that investors demand to hold the lowest-rated subprime auto bonds narrowed to 3.4 percentage points in October from about 5 points in January, according to data from JPMorgan.

David Aidi, a managing director at alternative-asset manager Blue Owl, began selectively acquiring new auto loans to be bundled into bonds in 2023 after staying out of the market for years. He said that the worst of the postpandemic delinquencies has passed for most platforms and that lending standards have been tightened.

Demand is so high for such debt that private-equity firms have started creating their own private asset-backed debt, using loans such as credit cards and mortgages, and selling it to insurers and others.

SHARE YOUR THOUGHTS

Are you bullish on bonds tied to car loans? Why or why not? Join the conversation below.

Daniel Liesener, a senior research analyst at Columbia Threadneedle, said the rising delinquencies are concerning given how much people need their cars.

“You can live in your car, but you can’t drive your house, and you need your car to get to work,” he said.

Yanique Green, a 32-year-old registered nurse in Yonkers, N.Y., is among those worried about losing her car after falling behind on her monthly payments of $880 earlier this year.

“If they take it from me, the likelihood of me being approved for another car loan might be very slim because of the credit hit,” said Green, a single mother to 7-year-old twins.

More borrowers could start missing payments if the economy worsens, pushing up unemployment and hurting their ability to make payments.

“If people are gainfully employed, that’s the biggest factor in them making their payments,” said Tripodes of Federated Hermes. “If they lose their jobs and they are living paycheck to paycheck, that’s really going to cause enormous disruption.”

Write to Vicky Ge Huang at vicky.huang@wsj.com and Matt Wirz at matthieu.wirz@wsj.com