The global economy has faced growing uncertainty in 2025.
Trump’s tariffs led to a massive sell-off in the global equity markets. Though equity markets have recovered, fears about inflation remain. It is no wonder that the US Federal Reserve has been reluctant to reduce interest rates.
Large outflows out of the US Treasury also led to speculations about the role of the US dollar as the dominant reserve currency and the US Treasury as a safe haven.
Yet, structured credit markets continue to prove resilient.
New issuance of US residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) between January and April 2025 has already exceeded that of 2024, according to S&P Global, a financial institution.
Also, in both Europe and the US, issuance of collateralised loan obligations has hit record levels, according to Ocorian, a financial services firm.
Furthermore, all of the participants in the Global ABS conference in Barcelona agree that structured credit issuance in 2025 will exceed that of 2024, with the majority expecting a 10-25% growth.
In this article, we examine why structured credit became increasingly important in the post-COVID-19 era and its continued role in the portfolios of institutional investors in today’s market. We’ll cover:
- A history of resilience: How institutional investors embraced structured credit post-COVID-19
- The continuing case for structured credit
- Approaching structured credit: Navigating its risks
Do you want to learn more about the structured credit market? Subscribe now for the cio investment club’s newsletter for regular updates about various financial markets.
1. A history of resilience: How institutional investors embraced structured credit post-COVID-19
Fixed-income securities in the post-COVID-19 world
The years following the COVID-19 pandemic were dire for fixed-income securities, as their returns experienced significant drawdowns.
Low initial yields, high inflation, and contractionary monetary policy were the three key causes, according to Schroders Capital, an investment management firm.
The yield on the US Treasury Bill was as low as 0.5% at some point, while that of global bonds even turned negative. Inflation reached double figures in some countries, while the US Fed raised rates to a high of 5.5%.
By July 2022, all investment managers had cut their allocation to fixed-income securities over the previous 18 months, according to a survey by Aeon Investments, an investment management firm.
Nearly half (49%) of these managers invested at least 25% of the funds they moved out of fixed-income securities in structured credit, citing attractive yields and capital preservation.
(Note: Past performance does not guarantee future results. Also, the mention of any fund or security does not constitute a solicitation to buy it.
What is structured credit?
First, what is structured credit?
In simple terms, structured credit is a financial instrument that pools different debt or loan products (of the same type or different types) and transforms them into tradable securities. The process of creating a structured credit is called securitisation.
The most common types of structured credit products are asset-backed securities (made up of auto loans, credit card receivables, student loans, ground leases, home equity loans, etc.), mortgage-backed securities (made up of residential and commercial mortgages), collateralised loan obligations (made up of corporate loans or corporate credit instruments), and collateralised debt obligations (they pool together all the other types).
As debtors make interest payments and principal repayments on these underlying loans, the accumulated cash is distributed to the holders of the structured credit products. These products can also be sold to other investors for capital gains.
Why structured credit proved resilient
Back to our main concern: Why did 49% of the investment managers surveyed by Aeon Investments shift from fixed-income securities to structured credit in the wake of high inflation and interest rates?
There were three reasons why structured credit proved resilient, according to Brown Brothers Harriman (BBH), a financial institution:
Higher initial yield
The best predictor of the returns an investor will earn on a fixed-income security is the initial yield offered, according to Schroders. A high initial yield can act as a cushion when rates rise and prices fall.
Consequently, as Treasury rates rise, portfolios with higher yields will outperform those with lower yields, at similar durations.
How does this relate to structured credit?
“Non-traditional segments of the structured credit markets offer particularly appealing yields and short defensive durations heading into this environment,” noted BBH. “This aids growth of capital relative to similar duration alternatives in the market.”
As seen below, US CLOs have historically provided higher yield than 10-year US Treasuries, high-yield bonds, leveraged loans, and municipal bonds:
The Yields of Structured Credit Vs Traditional Fixed-Income and Corporate Debt Investments
Source: First Eagle Investments
Thus, as high interest rates and inflation lead to price declines, the higher yield from structured credit provides a cushion for investors, which leads to higher returns.
For example, by providing higher yields than 10-year US Treasuries, high-yield bonds, leveraged loans, and municipal bonds, US CLOs also boasted higher returns:
Cumulative Returns of Structured Credit Vs Traditional Fixed-Income and Corporate Debt Investments
Source: First Eagle Investments
Amortising maturity structures
Most structured credit products (ABS, MBS, and CLO, especially) have an amortising structure that returns principal to creditors in instalments over a period. This makes them different from other credit assets that have a bullet structure, where principal is repaid once.
When a structured credit product has underlying loans with amortising structures, it provides several advantages to investors.
First, they can reinvest the cash received into assets with higher yields as interest rates rise. Also, since they recover capital faster, their exposure to interest rate risk reduces.
Given that the years after COVID-19 saw a significant rise in interest rates, structured credit made sense due to this amortising structure.
Floating-rate structures and price stability
Similarly, many structured credit instruments (CLOs, ABS, MBS, etc) have floating-rate structures. That is, they pay interest based on a benchmark rate plus a spread. If this benchmark rate rises, then coupon payments increase.
Thus, in an environment where the interest rate was rising, the coupon payments of these credit assets were keeping up, resulting in higher income for structured credit investors. And as we have seen, higher income means greater protection for returns.
Active management
Since many structured credit portfolios are actively managed, fund managers can make decisions that will take advantage of rising interest rates.
2. The continuing case for structured credit
“It’s all well and good that structured credit came to prominence in the post-COVID years,” someone may say. Now that the global economy is relatively more stable, does structured credit still have a role to play?
In April 2025, structured credit issuance grew by 1.7% YoY, according to S&P Global, a global financial institution.
Structured Credit Issuance in the US, January to April 2025
Source: S&P Global
More interesting to note is that within the four months ending April 2025, new issuance of residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) has already exceeded 2023 and 2024 figures. For ABS and CLOs, issuance is already 88.52% and 90.91% of the 2024 figure, respectively.
By their forecast, new issuance in 2025 would exceed that of 2024 across all four structured credit products.
We see a similar situation in Europe. Most participants at the ABS conference in June 2025 expect issuance in 2025 to exceed that of 2024. The chart below shows the percentage increase they expect:
Change in European-issued Structured Finance Between 2024 and 2025
Source: Fitch Ratings
The largest percentage of respondents (45%) expect a 10-25% increase in new issuance.
CLOs were the structured products expected to grow the most:
Expected Growth in Different Types of Structured Credit
Source: Fitch Ratings
This expectation is in keeping with current trends.
As noted above, CLO issuance hit record levels in 2025.
Though they struggled after Liberation Day, the recovery was swift.
“The almost V-shaped recovery of loan prices and CLO spreads over the first two weeks of May had rebalanced the market,” according to Deutsche Bank, a financial institution. “Even amid the heightened degree of uncertainty to date in 2025, both markets continue to keep pace with 2024’s record-setting deal activity, reflective of how strong investor demand has remained.”
Why does the structured market continue to grow in both the US and Europe?
There are six key reasons, according to Laz Partners, a human resources platform:
Higher risk-adjusted returns
The higher yields that structured credit provides result in higher risk-adjusted returns.
For example, structured credit in Europe provides a higher credit spread premium than corporate bonds across different rating bands (investment-grade to junk), according to BNP Paribas, a financial institution.
Comparing the Credit Spread Premium of European ABS, RMBS, and CLOs with Corporate Bonds
Source: BNP Paribas
Regulatory and capital efficiency
Regulatory developments, especially in Europe, are making structured credit more appealing.
Some recent examples in the EU include:
- EU debt securitisation rule revamp: In June 2025, the European Commission proposed a revamp of its restrictive debt securitisation prudential framework following calls from Mario Draghi, the ex-president of the European Central Bank, various EU leaders, and investors.
The commission seeks to simplify due diligence and reporting requirements, cut the minimum risk weight (how much capital should be held against potential losses) for senior tranches of STS (simple, transparent and standardised) securitisation from 10% to 5%, and lower capital charges for banks holding securitised assets by reducing the ‘p-factor’ in the capital-requirement formula for these senior tranches by 40%.
- Draft Solvency II amendments: The European Commission is currently conducting consultations on draft changes to Solvency II, the regulatory framework for insurance and reinsurance companies operating in the EU.
These amendments include a reduction in capital charges for securitisation, especially for senior STS and non-STS tranches. This will encourage insurers to participate more actively in securitisation markets, thus unlocking more liquidity.
They are expected to take effect in Q3, 2025 and apply from January 30, 2027.
- Overhaul of the framework for ABS: In June, the European Commission published a draft of proposals designed to reduce operational costs and soften the tight capital requirements that are keeping issuers and investors out of the securitisation market.
These proposals will make due diligence rules-based, improve the capital treatments of securitisation to increase demand for structured credit by banks.
These regulatory amendments are expected to increase the demand for structured credit products by banks in the EU and also encourage insurers to finally enter the market.
Diversification and resilience
The resilience of structured credit during market stress has made it attractive to investors. Also, it remains a good way to gain exposure to diversify into the real sector.
Growth in ground leases and infrastructure-like assets
Due to their long-term and inflation-linked cash flows, many investors are viewing ground leases as alternatives to bonds.
Technological advancements
New analytical tools are making it easier to conduct risk assessment and management of structured credit products.
Global credit and real estate trends
“Recovering real estate markets (CMBS and RMBS) and growing activity in distressed assets and securitisations are creating opportunities across the U.S., Europe, and emerging markets.”
There are three more reasons why investors, especially in Europe, are embracing structured credit, according to BNP Paribas:
Reduced interest rate risk
As we said above, most structured credit products pay a floating interest rate. This reduces interest rate risk to nearly zero, according to BNP Paribas.
Reduced default risk
Since there are many underlying loans in a single structured credit product, a single loan default does not spell doom.
Liquidity
The secondary market for structured credit in Europe is more liquid than that of private credit. Improved regulations have also made this market transparent.
3. Approaching structured credit: Navigating its risks
Many investors still view structured credit with suspicion due to the role it played in the 2008/2009 global financial crisis.
Though structured credit is now more transparent with better underwriting and regulations, especially in Europe, certain risks remain:
- Complexity: Structured credit products are often divided into tranches (senior tranches, mezzanine tranches, and equity or junior tranches), with each tranche providing a different risk-return profile. Investors need to understand the capital structure and its impact on defaults and cash flow distribution.
All of these add a layer of complexity to structured credit.
- Liquidity risk: Structured credit products can be illiquid, especially when market conditions are volatile. This is especially a concern for mezzanine and junior tranches, since their subordination means investors are taking on more risk.
- Credit risk: There is always the possibility of default in the underlying credit investments. Though most of these loans are backed by an underlying collateral, there is little probability that the value of the repossessed asset will cover the value of the loan.
- Valuation risk: Structured credit pricing relies on complicated quantitative models. Issuers making incorrect assumptions about the underlying assets can quickly lead to inaccurate pricing.
- Market risk: Macroeconomic trends in inflation, interest rates, and economic growth can affect the health of the market. Similarly, since structured products depend on the real sector, trends in the housing, commercial real estate, and automotive markets (for example) will affect them. Consumer and business credit health will also exert an influence.
- High fees: Though structured credit products can provide higher risk-adjusted returns, the high fees charged by fund managers can reduce the edge they have over traditional fixed-income securities.
So, how should institutional investors approach structured credit?
There are four points to note:
- Diversification is essential: We saw above that structured credit helps to deal with the risk of default because it combines various loan products into a tradeable security.
However, a certain macroeconomic or industry trend can lead to a large number of defaults for certain types of loans. This is what happened in the real estate market of 2008/2009. Investors with only MBSs would have suffered tremendously.
With a diversified portfolio that includes various types of structured credit, the impact of credit and market risks can be minimised.
- International exposure can help: Geographic diversification can also be essential.
For example, BNP Paribas advises that US structured credit investors diversify into the European market due to stronger regulatory frameworks and provisions for recourse in the latter.
“We believe that in the current context of uncertainty over the outlook for the US, it may be beneficial for investors to diversify their investment focus – especially to Europe,” they said. “Structured credit would be a good option due to attractive spreads and performance expectations. The regulatory framework and the propensity for European consumers and borrowers to pay down debt underpins the strength of the European securitised debt market.”
What’s important is not the specific recommendation. The point is that geographic diversification can protect institutional investors from macroeconomic trends that are specific to a certain economy.
- Active management may be key: The structured credit market is resilient, which means deep sell-offs are often followed by sharp rebounds, as we saw in April and May 2025.
But this has been a historical trend during market stress, as seen below:
Deep Sell-offs and Furious Rebounds in the Structured Credit Market
Source: First Eagle Investments
The transitory nature of the sell-offs in this market provides an opportunity for active portfolio managers to earn higher returns.
“We believe this price action creates periodic opportunities for active managers like ourselves to acquire assets at a discount and potentially generate alpha through active portfolio rotation,” said First Eagle Investments.
- Due diligence is important: Though there have been efforts to increase transparency, structured credit investors will still benefit from understanding the underlying assets behind particular structured credit products.
The deal structure, tranche hierarchy (or capital structure), and credit enhancements (with the use of derivatives such as swaps) must also be analysed so that the product can align with the fund’s risk-return profile.
Investors can also search for the credit rating of structured credit products produced by S&P Global Ratings, Fitch Ratings, and Moody’s Investors Service. They can also evaluate the balance sheet of issuers (lenders) to confirm their financial stability.
One way to conduct due diligence is to bounce your ideas off other asset managers and owners. They can offer fresh perspectives on the macroeconomy, industry, or specific structured product that may affect your view of its appropriateness.
Alternatively, they may point you to some high-quality structured credit products you have missed.
At the cio investment club, we provide you with a community of asset managers, asset owners, and other financial experts with whom you can exchange thoughts and ideas. Participating in such a community can improve your investment decisions, especially in the structured credit market.
We also organise exclusive roundtables and investment breakfasts where you can network and interact with other financial experts.
Are you ready to be a part of a community where you can share ideas about the structured credit market? Register today to become a part of the cio investment club.
Takeaways
- Higher initial yields, amortising maturity structures, and floating-rate features have made products like CLOs, CDOs, ABS, and MBS more resilient in a high-inflation, rising-rate environment.
- Despite the economic uncertainty the global economy has faced so far in 2025, issuance of various structured credit products in the US and Europe is on course to exceed 2024 levels.
- Beyond yield, factors like better regulations, diversification, lower interest rate risk, technological advances, and opportunities in real estate and infrastructure are keeping structured credit attractive.
- Complexity, credit risk, valuation risk, and liquidity concerns mean investors should diversify across asset types and geographies, use active management to capitalise on market rebounds, and conduct thorough due diligence.
This document is produced by Instaconnect Limited, trading as cio investment club, a company registered in England & Wales with registration number 15262951.
Instaconnect Limited is neither authorised nor regulated by the Financial Conduct Authority in the United Kingdom nor the Securities and Exchange Commission in the United States of America.
This document is a marketing documentation and is not intended to constitute an invitation or an inducement to engage in any investment activity. It is not intended to constitute investment advice and should not be relied upon as such. It is not intended and none of Instaconnect Limited, its holding companies or any of its or their associates, or any of the participants in the documentation, shall have any liability whatsoever for (a) investment advice; (b) a recommendation to enter into any transaction or strategy; (c) advice that a transaction or strategy is suitable or appropriate; (d) the primary basis for any investment decision; (e) a representation, warranty, guarantee with respect to the legal, accounting, tax or other implications of any transaction or strategy; or (f) to cause Instaconnect Limited to be an advisor or fiduciary of any recipient of this report or other third party.
The content and graphical illustrations contained in this document are provided for information purposes and should not be relied upon to form any investment decisions or to predict future performance. Instaconnect Limited recommends that recipients seek appropriate professional advice before making any investment decision. Although the information expressed is provided in good faith, Instaconnect Limited does not represent, warrant or guarantee that such information is accurate, complete or appropriate for your purposes and none of them shall be responsible for or have any liability to you for losses or damages (whether consequential, incidental or otherwise) arising in any way for errors or omissions in, or the use of or reliance upon the information contained in this document.
To the greatest extent permitted by law, we exclude all conditions and warranties that might otherwise be implied by law with respect to the document, whether by operation of law, statute or otherwise, including as to their accuracy, completeness, or fitness for purpose.
Instaconnect Limited and its logo are proprietary trademarks of Instaconnect Limited and are registered in the United Kingdom. Unauthorised copying of this document is prohibited.
© Copyright Instaconnect Limited 2025
