Key points
- Despite geopolitical uncertainty, rate volatility and sector‑specific stress, securitised products have remained orderly, supported by diversification, short duration and structural protections.
- Securitised credit typically benefits from broad underlying loan diversification and floating‑rate structures, helping to limit drawdowns and reduce sensitivity to rate moves compared with other areas of credit.
- While fundamentals remain broadly sound, dispersion across sectors and structures highlights the importance of bottom‑up analysis, manager selection and disciplined underwriting.
Looking through geopolitical noise
Securitised credit markets have navigated a volatile start to the year with resilience. Against a backdrop of heightened geopolitical uncertainty, shifting rate expectations and idiosyncratic stress, repricing in securitised spreads has remained orderly, underpinned by strong investor demand and supportive technicals.
Amid such volatility, the defining benefits of securitised investments, diversification, structural protection and active risk management, come to the fore. Importantly, securitised investments tend to be driven less by geopolitical shocks and more by underlying consumer and collateral performance. That distinction has recently helped securitised credit limit drawdowns and dampen volatility, in contrast to the larger gyrations experienced by broader risk markets.
Software exposure: Manageable, not systemic
This breadth of exposure has helped insulate portfolios from sharp drawdowns in individual sectors, including recent weakness seen in parts of the software market. Across Europe, approximately 10% of the investable CLO universe has some form of software exposure. Crucially, only around 4% sits within the sub-sectors that have generated the most concern.
This differentiation matters. CLO managers are not indiscriminately exposed to a single theme; rather, exposures vary meaningfully by strategy and mandate. Active engagement with managers has highlighted clear frameworks around what they own, why they own it, and how they seek to manage downside risk. In aggregate, software exposure has proven manageable.
Orderly repricing underpinned by strong technicals
This has been helped by market technicals entering the year on a solid footing. This was evident in February, at the time of the Structured Finance Association's (SFA) conference in Las Vegas, where spreads widened modestly but in an orderly fashion. Since then, issuance has slowed, allowing supply and demand to rebalance.
Spreads have largely reverted to where they were at prior to the SFA conference, underscoring the market's ability to absorb volatility without disruption. The repricing observed since late January has been healthy rather than disorderly. This adjustment reflects both technical factors and a reassessment of risk, rather than a deterioration in fundamentals.
Resilient collateral pools
On the consumer side, much of the rates-related stress in 2022-2023 has now washed through. Higher rates, inflation and house price adjustments prompted originators to tighten underwriting standards and rein in riskier lending. That discipline has transpired in the quality and performance of collateral pools, particularly in more recently originated transactions. Recent events in the Middle East raise concerns about a resurgence of inflation, however consumer lending is now at a relatively stronger position than the previous cycle.
While some segments, such as UK buy‑to‑let mortgages, show slightly higher arrears, performance remains within expectations, even at subordinate levels. In CLOs, rising CCC buckets over the past two to three years reflect pressure from higher floating rate costs, but absolute levels remain in low to mid‑single digits. Structural protections continue to provide meaningful buffers across the capital stack. Around 65% of a typical securitised deal is rated AAA, offering high quality debt that is also short dated.
Floating rate structures and duration protection
Another meaningful advantage then is that much of the asset class is issued at the short-end, with spread durations of three to five years. Coupled with floating rate characteristics, this helps portfolios avoid the duration‑driven losses seen elsewhere in some fixed income.
In a world where the path of future rates is uncertain and inflation remains a risk exacerbated by geopolitics, having a steady floating rate income explains the increased appeal of securitised investments.
Volatility that is easier to stomach
A key distinction between securitised credit and the leveraged loan market has been the nature of volatility. Sudden price moves of several points in individual loans, the underlying exposures of CLOs, can be difficult for investors to digest as can materially impact performance. However, diversified CLO portfolios can absorb those idiosyncratic loan price movements without materially impacting the overall credit quality, particularly for investment grade rated tranches, so the resulting price impact of those CLO tranches can be far less.
This relative stability has reinforced the reality that securitised investments exhibit less volatility than sometimes assumed. Crucially, this stability is not solely due to the structure of securitisations. Active management plays an important role in smoothing performance across different market environments.
Through disciplined credit selection, ongoing surveillance of underlying collateral and proactive trading, CLO managers, who manage the portfolio of loans, can address emerging risks early, rebalance exposures and preserve downside protection.
Solvency II reforms are unlocking insurer demand for securitised credit
Recent reforms to Europe's Solvency II framework are materially lowering capital charges for selected securitised investments, making areas such as CLOs, CMBS and parts of residential mortgage credit far more accessible to insurers.
This shift is already translating into growing interest from the insurance sector, broadening the institutional buyer base and supporting market depth. Over time, these regulatory changes could play a meaningful role in sustaining and strengthening European securitised credit markets as insurers reassess how and where they allocate capital.
Securitised credit: A resilient role within portfolios
Taken together, recent market dynamics reinforce the case for securitised credit as a resilient and adaptable allocation in uncertain times. Orderly repricing, robust collateral performance and strong technicals highlight an asset class driven less by headline risk and more by fundamentals.
In an environment where uncertainty around growth, inflation and policy remains elevated, securitised credit continues to offer a combination of stability, income and risk control that is increasingly difficult to replicate elsewhere. For investors seeking income, diversification and defensiveness within fixed income portfolios, we believe that securitised credit continues to stand out as a compelling allocation.
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Definitions:
Asset-backed securities (ABS): A financial security that is ‘backed' (or collateralised) with existing assets (such as loans, credit card debts, or leases), usually ones that generate some form of income or cash flow over time.
Capital structure: Refers to the amount of debt and/or equity used by a company to fund its operations and finance its assets. The optimal capital structure is the proportion of debt and equity that results in the lowest weighted average cost of capital (WACC), i.e. the blended cost of all sources of capital, including common shares, preferred shares, and debt.
Collateralised Loan Obligation (CLO): A securitised portfolio of corporate leveraged loans rated below investment grade (a rating on a bond where the borrower is perceived as having a relatively low risk of defaulting on repayment). The underlying loan pool is financed through the issuance of bonds that are structured into tranches with differing risk profiles, where interest and principal payments are prioritised according to each tranche's position in the capital structure.
CLO manager: The specialist investment manager responsible for selecting, monitoring and actively managing the underlying loan portfolio within a CLO, including decisions on credit risk, diversification and trading.
Diversification: A way of spreading risk by mixing different types of assets or asset classes in a portfolio on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.
Duration can measure how long it takes (in years) for an investor to be repaid a bond's price by the bond's total cash flows. Duration can also measure the sensitivity of a bond's or fixed-income portfolio's price to changes in interest rates. The longer a bond's duration, the higher its sensitivity to changes in interest rates, and vice versa. ‘Going short duration' refers to reducing the average duration of a portfolio, while ‘going long duration' refers to extending a portfolio's average duration.
Option-adjusted spread (OAS): The yield spread (difference in yields between two bonds or securities) after accounting for the value of any other extra rights embedded in each bonds' structure. It represents the compensation that investors might expect for credit or liquidity risk (i.e. risk that the borrower might not repay, or any difficulties associated with buying or selling).
Repricing: A market adjustment in the price or spread of securities in response to changing fundamentals, technicals or risk sentiment.
Volatility: The rate and extent at which the price of a portfolio, security, or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility, the higher the risk of the investment.
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