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Industry-level trends and manufacturer performance affect prepayment speeds on prime auto ABS deals, and Detroit-based manufacturers exhibit the strongest link between the two occurrences, according to Lehman Brothers analysts.
In light of the connection, investors can realistically factor in overall industry trends when estimating prepayment expectations.
"Furthermore, since bond valuation is based on three-month ABS speeds, investors should take seasonality in sales into account when pricing bonds, especially for bonds with shorter maturities," Lehman said.
In prime auto ABS, analysts said, up to 90% of total prepayments are voluntary prepayments, and most likely stem from trade-ins. Therefore an increase in auto sales, which typically...