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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Le performance passate non sono indicative dei rendimenti futuri. Tutti i dati dei rendimenti includono sia il reddito che le plusvalenze o le eventuali perdite ma sono al lordo dei costi delle commissioni dovuti al momento dell'emissione.
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Non vi è alcuna garanzia che le tendenze passate continuino o che le previsioni si realizzino.
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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.