The debt market of the United States of America has found a new star, the cautious Canadian consumer paying off credit card bills. Recent news reports suggest that the banks of Canada are now moving south in order to get funding for their various credit-card programs. What is attracting them towards the U.S. market is the lower cost of borrowing. Also, they are readily finding eager buyers since the debt is being backed by the frugal Canadians. These people are the absolute opposite of their spendthrift U.S. counterparts and will pay off credit card sums at higher rates even if they have staggeringly high household debt.
Why are the U.S. based investors attracted to the debt in Canada? This is primarily because the consumers in Canada have a reputation of paying off the entire bill amount each month, which is usually not the case with the American consumer. The average payment rate per month for the Canadian consumer was recorded at 47 percent in the third quarter of the year. The average payment rate for the American consumer, on the other hand, was 29 percent only (as reported by Fitch Ratings).
Issuing securities preferable over selling bonds
For fixed-income investors, credit-card balance backed bonds are highly attractive because they are reliable as far as the stream of cash-flow is concerned. This means that issuing securities is usually less expensive than selling off corporate bonds for borrowers.
Also, there has been a steady growth in the market with sales reaching 29.9 billion dollars this year. They are expected to touch $40 billion by 2017, reports JPMorgan Chase & Co. Some of the Canadian banks which are playing a significant role in boosting these figures include the Toronto-Dominion Bank and the Bank of Nova Scotia.
The banks in Canada selling ABS credit card could pick up around ten to fifteen basis points with regards to savings in the American market (asset-swapped basis, approximate pricing 78 to 80 basis points).
Exercise caution even with credit-card backed securities
To make things clear, securities backed by credit cards are not secured by collateral and are only profitable if the customers keep making the payments consistently. Also, even the prudent Canadians have had a history of being in high debts which have even surpassed the gross domestic product of the country. However, even if Canadians end up with higher mortgages, there isn’t any evidence that it is has affected or will affect their credit-card bill paying capacity.