What are asset-backed securities?

ABS provides investors with the opportunity to add shorter-duration assets at varying risk tolerances

Mar 16, 2018 | Invesco

Asset-backed securities (ABS) are bonds secured by diversified pools of receivables across a variety of consumer or commercial assets. These assets include credit card, auto loan and lease, student loan and equipment receivables as well as “esoteric” assets, such as timeshare loans, whole business loans, container lease or unsecured consumer loan ABS. ABS are “bankruptcy remote” as assets are transferred from the issuing entity to a legally separated trust. Cash flows generated from the trust assets are used to pay the interest and principal on the ABS.

Why consider ABS?

Adding ABS is an investment strategy that seeks to reduce portfolio risk concentrations while gaining exposure to one of the largest components of the U.S. economy, the consumer. There are several attributes which can make ABS an attractive investment opportunity including its high credit quality, as the vast majority of the ABS market is rated AAA, generally favorable liquidity, and ratings stability relative to most other fixed-income securities.

Other notable strengths include historically lower spread volatility relative to other fixed-income investments, less sensitivity to interest rate changes, predictable cash flows, and structural credit support to protect investors against collateral performance deterioration.
 

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