ABS: Why it can pay to stay floating

It has been another strong year for European asset-backed securities (ABS), and securitised markets have looked through the recent rates volatility well, with spreads broadly stable across the capital structure in Q3 2026. Technicals have been very supportive: record and well-diversified issuance across sectors and issuers has been met with strong demand, particularly from real money investors in investment grade (IG) ABS and IG collateralised loan obligations (CLOs). AAA auto ABS and residential mortgage-backed securities (RMBS) spreads have widened by only around 5bp since early September, driven largely by heavy primary and secondary supply as dealers' AAA inventories have filled up, rather than by any change in fundamentals.

We would not be surprised to see some further widening if rates volatility persists. However, it is worth remembering that ABS and CLOs are floating rate assets, with coupons that reset in line with underlying interest rates using Euribor or SONIA. A moderate hiking cycle can therefore be good news for investors, as higher base rates feed straight through into higher coupons.

The floating rate nature of ABS and CLOs also provides a valuable hedge against rates volatility. That has been tested in recent weeks by a sharp sell-off in government bonds, with 10-year Bund yields rising 73bp to 3.58% between June 30 and September 30. This repricing has been driven mostly by expectations of higher interest rates, in turn fuelled by higher oil prices and higher inflation expectations. Floating rate assets tend to see much less rate volatility than fixed rate corporate bonds. During the Gilt market turmoil that followed Liz Truss's “mini-Budget” fiasco in September 2022, AAA ABS stood out as both less volatile and highly liquid. Prime RMBS fell around 1.5 points, against around 7 points for fixed rate corporates, and bid-offer spreads on senior RMBS remained relatively contained even as trading volumes surged.

In a rising rate environment, European securitisation has provided exactly what many investors hold these assets for: higher yields than similarly rated corporates, more stable income, lower volatility, and solid liquidity. The last hiking cycle is the best guide to what that means in practice. Between July 2022 and September 2023, the European Central Bank (ECB) raised its deposit rate from -0.5% to a peak of 4%. In 2022, as rates repriced, euro IG corporates (using the ICE BofA Euro Corporate index, which excludes CLOs) with 4-5 years duration lost 13.9%, with annualised volatility of 5.7%. European ABS (using the Bloomberg Pan-European FRN ABS index EUR) lost just 1.5%, with annualised volatility of 0.5%. IG corporates bounced back more strongly in 2023, but over the two years combined ABS returned 3.8%, while IG corporates were still down 7.0%.

The worst drawdown for ABS in that period was 2.3%, between January and September 2022, and the index was back at its previous high by April 2023. IG corporates fell 16.2% to October 2022, and only regained their end-2021 level in October 2025.

Despite the rates sell-off, this year has followed the same pattern. As of September 30, European ABS has returned 3.2% year-to-date while IG corporates are down 1.2%, with ABS volatility of just 0.2% compared with 3.1% for IG corporates.

In the US it has been a slightly different story. US CLOs tend to trade more closely with the broader macro picture, and we have seen some spread widening here recently as some investors have rotated out of floating rate AAAs, with higher US Treasury yields becoming a more competitive alternative.

ABS has been one of the best performing areas of fixed income amid the broad sell-off in government bonds, and we are mindful that some investors will be tempted to take profits and rotate into fixed rate alternatives that have cheapened significantly with the move in rates. But selling a stable, low volatility floating rate asset to add duration is ultimately a bet on where rates go next.

Over the cycle, European ABS has delivered higher returns than euro IG corporates with around a tenth of the volatility. If rates volatility continues, ABS will feel it too, but likely far less than fixed rate credit, so we think it offers strong risk-adjusted return potential at this juncture.