Cecile Gutscher:

A boom in sales, a pickup in defaults, and risk premiums keep on dropping.
 It’s all happening in the market for subprime auto bonds, where loans to American consumers with some of the patchiest credit histories are packaged into securities to be sold to big investors. A decade after risky mortgage lending toppled the U.S. financial system, the securities have rarely been so popular. But the collateral behind the bonds is getting less safe: car-owners are increasingly falling behind on bigger loans with longer repayment terms made against depreciating assets.
 “As used-car values drop a bit and delinquencies and roll rates begin to increase, the subprime sector will show significant underperformance and lack of decent liquidity,” said Don McConnell, senior portfolio manager at Bank of Montreal’s BMO Global Asset Management in Chicago, who helps manage $15 billion of taxable bonds. He’s reinvesting cash from maturing notes elsewhere.