big bargains have made a roaring comeback on bonds tied to the 162 trillion pile of us consumer debt higher borrowing costs tighter credit conditions and sharp losses have been defining forces on wall street this year as the federal reserve has increased interest rates quickly to fight inflation stuck near 8 but the tumult also has investors in bonds tied to us consumer and mortgage debt scouring for opportunities as yields climb to crisisera levels even while the american labor market has remained strong at a 37 unemployment rate in october “i don’t think there’s an appreciation for just how cheap a lot of the bonds are out there” said john kerschner head of us securitized products at janus henderson investors which oversees roughly 15 billion of mortgage auto and related assets out of about 80 billion in fixedincome globally when consumers take out a car loan tap their credit card or receive a home loan pricing often hinges on conditions in the socalled “securitization market” where wall street for decades has been packaging up household and corporate debt to sell as bond deals in the wake of the 2007’08 global financial crisis financing for everything from subprime mortgages to creditcards froze up until the fed slashed rates and took other measures to restart credit markets credit has yet to dry up in this cycle but rising interest rates since the fed started raising interest rates have led the sector’s investmentgrade bonds debt rated aaa to bbb to fetch high singledigit yields kerschner said for riskier bonds with bb and lower ratings yields have been closer to 13 doubleline ceo jeffrey gundlach touted similar yields in assetbacked securities and other parts of credit markets hit hard this year despite rising recession risks in a cnbc interview see now’s the time to buy ‘bombedout credit markets’ says doubleline’s jeffrey gundlach specifically threeyear bbb rated auto bonds the lowest investmentgrade bracket were pegged at a spread of 410 basis points above the riskfree benchmark in october see chart up from a oneyear low of 96 basis points according to deutsche bank research adding a spread of 400 basis points to the more than 4 benchmark 10year treasury yield tmubmusd10y roughly equates to an 8 bond yield on riskier mortgage bonds called “nonqm” by wall street that lack government guarantees spreads hit a high of about 625 basis points in october from a 12month low of 205 spreads still risk heading wider according to bofa global research given “persistently high inflation a hawkish fed and a weaker economic outlook” although some parts of credit markets appear to be reflecting a degree of recessionlevel prices with speculativegrade subprime auto bonds with bb credit ratings pricing at 12 to 13 yields in october up from 5 in january according to bond issuance tracker finsight subprime auto has been long considered a harbinger for household debt because it often reflects the immediate economic hardship felt by wageearners and borrowers with lower credit score when prices and borrowing costs climb read why the car market might be ‘the harbinger’ of when the fed can pivot but with the hot jobs market deutsche bank pegged 60plus day delinquencies on subprime loans in auto bond deals at 455 in october higher from a year ago but closer to prepandemic levels see the us jobs market is too ‘strong’ the fed says so expect rising unemployment the fed has been tightening the screws on financial conditions in an effort to pull inflation down from a near 40year high to its 2 target with this week seeing another jumbo 75 basis point rate increase and central bankers signaling that rates could stay higher for longer than initially expected “something is bound to break when you do that” said david petrosinelli managing director sales and trading at insperex a brokerdealer while pointing to yields in parts of the securitization market at their highest in a decade or more “there’s something afoot but i don’t know if it gets as ugly as 2008” he said it already has been a year of historical losses in bonds and painful losses in equities as wall street has been forced to reprice assets as the 10year treasury yield has climbed quickly above 4 mark from a december low of 134 the 10year yield is used to price consumer and corporate debt the hope from investors has been that the 10year yield might be near a peak potentially helping both bonds and stocks find a footing the sp 500 index spx was down roughly 22 on the year through friday according to factset as a proxy for the broader bond market the ishares core us aggregate bond etf agg exchangetraded fund was about 17 lower for the same stretch but with bond yields now higher it also could mean better days ahead for investors particularly if the fed can achieve its goal of avoiding a long harsh economic downturn and high unemployment “it probably sets investors up for a very good return for 2023 because 2022 has been beyond awful” kerschner at janus said