The Big Idea
Better value in consumer and real estate debt as tariff wars rage
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Returns to consumer and real estate debt have been higher and less volatile this year at least relative to any kind of corporate exposure, testament to better insulation from at least the direct impact of tariffs. Consumer debt also still trades at relatively wide spreads. It’s a good case for better relative value in consumer debt while the world waits to see the direction of US tariff policy after the pause.
Better performance so far in consumer, real estate exposures
Stripping out the impact of interest rate risk leaves a good picture of excess returns across different parts of fixed income this year, and those pictures say good things about consumer and real estate exposures. Specifically:
- From January through March, initial news broke about US tariffs on Canada, China and Mexico along with news of US tariffs on steel and aluminum; Treasury debt, which delivers no excess return by definition, along with agency CMBS, ABS, private CMBS and agency MBS showed higher returns with generally less volatility than investment grade corporate debt, leveraged loans or high yield (Exhibit 1).
Exhibit 1: Consumer and real estate debt topped corporate exposure Jan-Mar
Source: Bloomberg, Santander US Capital Markets
- In April came Liberation Day and then news of a 90-day pause in tariffs. Again, excess returns on agency CMBS, ABS, private CMBS and agency MBS topped sectors with direct corporate exposure. MBS notably took a big hit from rate volatility in April, annualized excess return fell sharply from January-to-March levels across all assets and volatility rose by roughly three to six times (Exhibit 2).
Exhibit 2: Consumer and real estate debt topped corporate debt again in Apr
Source: Bloomberg, Santander US Capital Markets
One read of these results is that investors see consumer and real estate balance sheets as better insulated from the direct impact of tariffs, although still exposed to the indirect effect of slower economic growth. A company hit by tariffs on its imports or exports, for example, may see its earnings drop faster than the wages of its employees. And employees laid off may be able to find new work faster than the company can rearrange its supply chains or find new export markets. Owners of commercial real estate similarly can keep rents steady and replace tenants, at least in real estate that can serve multiple types of businesses.
Consumer debt still trades at the wide end of its 5-year spread range
In the aftermath of developments through April, debt backed by credit card and auto loans and leases still trades at the wide end of its 5-year spread range—in contrast to most other major segments of fixed income that still trade in early May at or below the median of the last five years (Exhibit 3). The current 53 bp option-adjusted spread on credit card ABS is wider than 82% of sessions in the last five years, and the 74 bp OAS on auto ABS is wider than 67% of sessions.
Exhibit 3: Card and auto loan debt sits at the wide end of its 5-year spread range
Source: Bloomberg, Santander US Capital Markets
Benchmark ABS against short corporate debt
Because most ABS is short, the most actionable benchmark for value is short corporate debt. ‘AAA’ 3-year auto ABS, for example, has traded lately at a spread to the 3-year Treasury of between 65 bp and 75 bp (Exhibit 4). Meanwhile, ‘A’ 3-year corporate debt has traded at a spread of around 60 bp. Beyond some insulation from the direct effects of tariffs, the ABS improves portfolio weighted average rating, spread and yield.
Exhibit 4: Investment grade auto ABS trades wide to 3-year ‘A’ corporate debt
Source: Bloomberg, Santander US Capital Markets
Not all consumers are equal, so stick with prime
Not all consumer exposures are equal, of course. Rising delinquencies on the weakest consumer balance sheets—from FHA and rural housing mortgages to subprime auto loans to unsecured consumer loans—show stress. And stress is likely to pick up through the balance of this year. The New York Fed estimates that as of September 30 last year, 9.7 million borrowers held $250 billion in delinquent student debt. As borrowers begin to either repair the delinquencies or go into collection this year, that should add to each borrower’s total debt service burden and potentially trigger delinquencies in other forms of debt. Proposed cuts in federal spending, which flow disproportionately to households at the low end of the income distribution, could also add to stress on weaker household balance sheets. Investors should stick to prime consumer ABS exposures.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
