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News
Investors say CLO market is hot but caution remains
by Shant Fabricatorian
Optimism is returning to the CLO market in both the US and Europe. Momentum is rapidly rebuilding as investors acclimatise to the policy vagaries of the second Trump administration.
“Hot, hot, hot!” is how one CLO investor described the market, which is being boosted by an uptick in confidence and backed by cash coming off the sidelines. That represents a sharp reversal after the wobbles seen during the widespread volatility across global markets in April.
“The old Wall Street adage is ‘sell in May and go away’ — but most people are probably not thinking it was the right strategy this year, because the market is up really sharply,” said Jonathan Insull, chief investment officer at Nassau Global Credit. “The magnitude and speed of the change in April caught people off guard and forced them into a risk-off mode. Now, just over the last 30 days or so, there’s this feeling the coast is maybe clear.”
The magnitude and speed of the change in April caught people off guard
Jonathan Insull
Chief investment officer
Nassau Global Credit
A new acronym is sweeping trading floors — TACO, or ‘Trump Always Chickens Out’. It refers to the perceived tendency of the US President to reverse course when markets show resistance to the administration’s hastily implemented plans.
But while on the surface markets seem recovered — with issuance and spreads returning to levels not far from those seen earlier in the year — there’s still caution in the air, say market participants.
“Maybe there’s a bit more caution than at the start of the year, but it does seem positivity has returned,” said Elena Rinaldi, a portfolio manager at TwentyFour Asset Management.
“CLO investors don’t want to miss out on the attractive yield that is on offer. And it’s difficult to see a catalyst that could change this.”
In Europe, Rinaldi expects an uptick in resets, although the recent burst of new issuance — 15 deals in May, according to Creditflux data — may slow.
“With the credit markets having rapidly recovered from the April widening, we are seeing strong demand across the CLO stack,” said Russell Holliday, head of Europe and portfolio manager at Sound Point.
According to market sources, this demand has been driven by US investors once again looking at Europe, contributing to the spread compression that took place in May, especially in the lower mezz.
The US market has similarly seen a strong burst of new issues, with 38 BSL deals pricing in May compared to 28 in April.
“New issue has picked up nicely at considerably tighter spreads since Liberation Day,” said Wayne Hosang, portfolio manager at Crescent Capital.
