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News Investor’s Corner
‘CLO spreads widened alongside all other spread markets’
by Lisa Lee
Lisa Lee: What is your take on the CLO market now? We had a slowdown. But we had a number of print-and-sprints in the US.
Edwin Wilches: The CLO market overall remains very resilient. Spreads widened alongside all other spread markets. CLOs in particular exhibited really good excess returns, especially relative to investment grade corporates. We did see a bifurcation in performance between the US and Europe. Largely speaking, Europe outperformed the US. And that’s true across many asset classes, not just CLOs.
One of the things that the European regulators are trying to do is to move the financing of the real economy into capital markets. In Europe, there’s a high reliance on banks. We expect to see some regulatory updates in the coming weeks that we expect will be positive.
Europe is looking to embark on ambitious defence programme spending. Jane Frazier from Citi mentioned the USD 11tn of savings in Europe at the Milken Conference — Europe is also looking to channel some of that into productive investments.
LL: What about the arb?
EW: We’re seeing some retracement of spreads on the liability side — but I would say the arb never works.
We have a one-and-a-half trillion dollar market, so I feel pretty confident that we’ll continue to see a lot of issuance. We also have a lot of resets coming. We estimate about USD 50bn will need to reset, or is in the money, in terms of spreads where the current liability is stacking versus the market. So again, we continue to expect a lot of activity.
We estimate about USD 50bn will reset
Edwin Wilches
Co-head of PGIM Fixed Income’s securitised products
PGIM
LL: Some people are expecting an economic slowdown or even stagflation. So there could be an uptick in defaults. What is your expectation?
This year, we expected a lower default rate, although we are conscious that about 5% of loans have direct impact from tariffs — and close to 15% of industries could be tariff-related. So maybe we would expect to see [a default rate] not as high as 5%, but we do expect it to be closer to 3% or 4%.
EW: We have seen stress in the credit markets for the past two years. Depending on the data set you look at, we can say roughly 10% of the market has had some sort of stress associated with it, whether that’s defaults or liability management exercises.
LL: What do you think managers should do?
EW: The key thing is the existing portfolios are the existing portfolios. I don’t think you can risk-manage your way out of them at this point in time. You had an opportunity in the first quarter before tariffs came, but now everyone is focused on the tariff outcomes.
It’s really going back to re-underwriting the existing portfolios and hearing from managers how their strategy may change.
LL: And a final thought about the market?
EW: The market remains very healthy. I think it’s a balance of volatility for opportunity, but also concrete discipline.
