What does shifting sentiment mean for ABS and CLOs?

Last week we wrote about a notable shift in market sentiment and how this had impacted our view of relative value within fixed income.

Asset-backed securities (ABS) markets, including collateralised loan obligations (CLOs), have historically exhibited low correlation to more mainstream markets and thus tend to be more insulated from wider market volatility. However, after a week of risk assets selling off globally it is not surprising to see some spillover into ABS and CLOs.

So, where has the impact been felt, and has it changed our view on relative value?

The European ABS market has remained very active, with three ABS and seven CLO primary transactions priced last week and plenty of supply in secondary.

ABS spreads have held up pretty well, aided by the supply-demand imbalance that has characterised the market since the start of the year. The three primary deals showed strong demand, with all mezzanine tranches oversubscribed by 4-5 times, indicating robust investor interest and helping to keep spreads relatively stable for the time being. In secondary, supply via Bids Wanted in Competition (BWIC) lists reached a weekly record for the year last week at €260m, mostly driven by senior auto and consumer ABS paper. However, this surge in supply was met with healthy demand, which has kept spread widening to 2-5bp at the top of the capital structure and 5-15bp in lower investment grade tranches. In comparison, European investment grade and high yield corporate bond spreads at the index level have widened by around 6bp and 30bp respectively versus their February tights.

CLOs have unsurprisingly seen more spread widening, given they are the highest spread securitised product in the market and also the highest credit spread duration product. CLOs are traded by a wider investor base and are more sensitive to macro volatility as they are backed by corporate loans, hence they tend to be more correlated to broader credit moves than vanilla ABS transactions.

With the shift in risk sentiment in the last couple of weeks, US CLO spreads started to widen, and European CLOs followed suit. The widening follows an extended rally in lower mezzanine CLO notes, driven by strong demand which accelerated in the first few months of 2025 leading spreads to near-record tights both in Europe and the US. Up to the end of February, euro AAA CLO spreads had tightened by around 10bp and euro BB and B notes by around 100bp year-to-date. This recent pushback from investors also reflects the overwhelming issuance volume since start of the year, with new issue supply in Europe of €15bn year-to-date being more than double the same period in 2024, with an additional €7bn of refinancings.

Last week European CLO supply on BWICs increased to around €740m, almost three times the weekly average over the last three months, though the proportion of paper that went unsold was also higher than the recent average at 20%. AAA spreads drifted 6-10bp wider and BBB spreads 25-50bp wider. In the sub-investment grade tranches the move was more pronounced, with euro BB CLO spreads widening 60-75bp and Bs by around 100bp. The move in US CLOs was slightly more contained, although both wider-tiered and more credit-sensitive profiles have moved further. US CLOs also saw a second heavy week of secondary supply, with $2bn listed via BWICs last week on top of 34 transactions placed in the primary market.

While trading activity was high, it wasn’t driven by panic or forced selling or isolated to certain buyers. There was a diversified mixed of sellers across jurisdictions and client types, with accounts taking risk off and others rotating into other risk assets.

On the asset side, leveraged loans (which make up the bulk of CLO portfolios) saw significant price declines with the European Leveraged Loan Index (ELLI) closing on Friday at 97.6, which is now down 0.4 on the year having reached a peak of around 98.7 just two weeks ago. The move reflects the impact of consistent loan supply, which has been driven by a combination of liquidating CLOs, investors’ concerns about tariffs and the spike in German Bund yields after the country’s fiscal policy shift. This could represent an interesting opportunity, both for CLO equity buyers and CLO managers that are looking to ramp their portfolios, especially those that locked in cheaper liabilities in the past few months.

In terms of relative value, we already highlighted that continued tightening in European CLO spreads from the start of this year was a reason for caution. However, while we think it remains important to maintain a high level of liquidity and flexibility, spreads have now retraced to levels we last saw in December. With Eurozone growth potential now higher than previously expected and the US economy facing plenty of uncertainty, we think European ABS and CLOs look an attractive proposition for investors looking for stable income and credit protection. Our colleagues in New York report that sentiment for European risk is growing in the US, which is no surprise given the EURUSD basis swap is currently adding around 200bp to European yields when hedged back to dollars, making them look more attractive against US comparables.