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The performance of risky car loans backing subprime bonds improved in February for the first time since May 2016, as deliquencies fell to 5.35 per cent from 5.6 per cent in January, according to Fitch, a ratings agency.

Year-over-year delinquencies are still elevated from 5.16 per cent in February 2016 and close to peak levels of 5.96 per cent hit in the mid-1990s. Fitch tracks an index of loans for deliquencies exceeding 60 days.

Fears have been rising over a potential credit bubble in the market for bonds backed by auto loans, as competition among lenders has led to declining credit quality of borrowers. The agency said:

Fitch expects ANL in both sectors to recede in the coming months as consumers typically benefit from tax refunds from February through May, enabling consumers to focus on debt consolidation and repayment. Vehicle demand can also increase in the spring months, providing a boost to recovery rates. However, Fitch believes this effect will be largely muted for the remainder of 2017 and the foreseeable future due to historically high off-lease supply.

Copyright The Financial Times Limited 2017. All rights reserved.

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