Chart to Watch: Retaining high yields through AAA CLOs as rates fall
A falling rate environment presents a challenge for income-seeking investors. Where can you go in the hunt for yield as cash rates decline?
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2 minute read
Key takeaways:
- The European Central Bank (ECB) cut rates again as it moves close to the neutral policy rate. Given pervasive uncertainty on tariffs, new governments and economic growth, the path of interest rates is highly uncertain.
- As cash rates fall, the pursuit to maintain income becomes more challenging for investors and capturing high spread and yield becomes tantamount to success.
- AAA CLOs offer a potential solution by offering attractive spread and yield that could counterbalance the decrease in income from cash balances and enhance diversification within fixed income portfolios.
Source: Janus Henderson Investors, Bloomberg, as at 6 March 2025.
Note: Chart showing historic cash rates, forward rates on USD, GBP and EUR OIS curves. Expected AAA CLO yields are the sum of the respective USD, GBP and EUR forwards curves with 5 March 2025 spread on Citi EUR CLO AAA 2.0 index. There is no guarantee that past trends will continue, or that forecasts will be realised. For illustrative purposes only. Past performance does not predict future returns.
Moving into AAA CLOs can provide mitigation to falling rates
The ECB has delivered another interest rate cut to take its policy rate down to 2.5%, the upper end of the neutral interest rate range. The ECB has a delicate balancing act of reaching inflation and growth targets amid significant macro and political uncertainty. The ECB still views the policy rate as restrictive – albeit “meaningfully less restrictive” according to President Lagarde – and so we may see progression of the rate cutting cycle.
One thing is certain though: the future direction of interest rates remains highly unpredictable, presenting a challenge for investors to sustain yields as rates decline. The income from floating rate assets like AAA CLOs, which includes a credit spread and a base cash rate (often linked to EURIBOR), varies with rate changes. In a falling interest rate environment, the credit spread becomes increasingly significant to the overall yield.
“Capturing better relative value in a rate declining environment therefore becomes crucial. Investing in AAA CLOs can be key to preserving income levels despite lower cash rates. This underlines the appeal of this profile, which offers compelling spreads relative to other fixed income asset classes and allows investors to achieve steady income while effectively managing risk. The asset class also offers diversification benefits given its floating rate nature and short duration.”
– Ian Bettney, Portfolio Manager, Secured Credit Team
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These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
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Specific risks
2 minute read
Key takeaways:
- The European Central Bank (ECB) cut rates again as it moves close to the neutral policy rate. Given pervasive uncertainty on tariffs, new governments and economic growth, the path of interest rates is highly uncertain.
- As cash rates fall, the pursuit to maintain income becomes more challenging for investors and capturing high spread and yield becomes tantamount to success.
- AAA CLOs offer a potential solution by offering attractive spread and yield that could counterbalance the decrease in income from cash balances and enhance diversification within fixed income portfolios.