Technical resilience and shifting macroeconomic winds are reshaping the CLO landscape in both the U.S. and Europe. For investors seeking yield with strategic positioning, the latest market movements point to compelling prospects and recalibrated risk dynamics.
Amid a backdrop of shifting global political and economic signals, the CLO market is showing renewed strength, with technical factors playing a central role in performance. In the U.S., initial reactions to President Trump’s policy announcements—particularly around tariffs and public sector job cuts—sparked volatility. Yet investor sentiment is pivoting. Treasuries rallied, growth stocks saw outflows, and capital has rotated toward value and international exposure, with the NASDAQ falling and indices like the Hang Seng and Euro Stoxx 50 posting strong gains.
Europe, meanwhile, is undergoing significant policy transformation. Under the leadership of Germany’s new Chancellor Friedrich Merz, the country may revise its restrictive debt brake law, unlocking fiscal room for infrastructure and defence investment. In tandem, optimism is growing around a potential resolution in Ukraine, which could further catalyse growth across the region.
In the leveraged loan space, Europe has taken the lead. February saw aggressive repricing and a rally in secondary pricing, bolstered by robust CLO issuance and tightening supply. The Morningstar European Leveraged Loan Index delivered a solid return, and triple-C rated loans notably outperformed. Meanwhile, U.S. sentiment has wavered under trade policy concerns and equity volatility. While refinancings remain the primary source of new supply, the share of index loans priced above par fell sharply. Nonetheless, investor discipline remains high, with managers opting to reduce risk rather than chase discounted spread opportunities. CCC exposures have declined in both regions, reflecting a cautious tilt in portfolio construction.
The CLO primary market continues to exhibit strength, especially in Europe where issuance volumes have more than doubled year-on-year. U.S. activity remains healthy, albeit slightly down compared to last year. ETF demand—particularly for AAA tranches—has driven refinancings and resets, helping to rejuvenate the CLO universe and reduce the share of post-reinvestment deals. These technical shifts have supported tightening spreads, although some resistance is emerging from investors now exploring alternatives like agency CMOs or pivoting to more attractive valuations in European CLOs.
Notably, appetite for BB-rated CLO tranches is surging, with wealth managers chasing yield and spreads printing at historically tight levels. However, the narrowing between AAA and BB spreads raises the likelihood of decompression ahead. CLO equity remains in high demand, as it offers compelling excess spread, attractive quarterly cash flows, and a strategic counterbalance to other asset classes with back-ended return profiles.
In secondary markets, activity has tapered compared to last year, though conditions favour buyers. CLO debt is trading at premiums, with callable assets above par and strong ETF inflows pushing secondary spreads tighter than primary. CLO equity is benefiting from low loan default rates and strong reinvestment demand, with investors rotating into longer-dated positions to capture optionality.
Year-to-date performance has been robust, particularly for fixed income, as macro headwinds soften. AXA IM views CLOs as a core component of credit allocation strategies, delivering diversification and return enhancement over similarly rated corporate credit. The current environment calls for selective positioning, favouring active management across geographies, primary and secondary markets, and the credit rating spectrum.
Mezzanine exposures are being tactically managed with a focus on carry and risk-adjusted returns. For equity, the emphasis is on primary deals with quality managers and tight liability structures, complemented by opportunistic secondary buying. The strategy seeks to harness the high cash flow profile of CLO equity while maintaining agility amid evolving credit conditions.
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.
