Bond investors win big betting on US consumer

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Investors who bet U.S. consumers would keep paying debts this year are reaping a windfall as households spend less and save more against the backdrop of a still-ailing national economy.

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Bonds backed by consumer loans returned about 10% through October, according to data from Citigroup Inc., making them one of the top-performing investments of 2020. Prices for the so-called asset-backed securities have soared as consumers bucked expectations and responded to the coronavirus pandemic by paying down debt at a rapid clip.

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“I don’t know if it will last but what’s happening now in terms of the American consumer, well, it’s downright un-American,” said Paul Norris, head of structured products at investment firm Conning. “We’ve had to throw out the playbook of everything we’ve learned about consumer behavior.” Norris has been adding consumer-loan ABS to his $20 billion portfolio throughout the year.

Investors will get a fresh look at consumer health in coming days with data on retail sales due Tuesday, along with earnings from companies including discount retailer TJX Companies Inc. A widely tracked consumer-sentiment index reported a decline last week, with Americans’ outlook souring postelection as the pandemic worsens.

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Household debt rose to a record $14 trillion in 2019 as Americans spent aggressively in a tight labor market, using personal loans to cover car and home repairs, credit-card consolidation and other expenses. When the coronavirus hit, lenders expected delinquencies to spike, as did traders of consumer ABS, complex bonds linked to bundles of individual consumer loans.

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