BlackRock turns bullish on overlooked corner of European fixed income
European fixed income markets offer a range of trading opportunities for investors, with the region’s collateralized loan obligation space now emerging as a key alpha-generating play, according to BlackRock . “If there’s one area where I think real value is, or the best relative value, it’s in a somewhat niche area, which is in the CLO credit markets,” James Turner, co-head of global fixed income in EMEA, told CNBC’s “Squawk Box Europe” Monday. A collateralized loan obligation, or CLO, consists of a pool of corporate loans of varying credit worthiness bundled together and sliced into a series of tranches. Each tranche offers a differing return profile based on the level of underlying loan risk, many of which provide better returns than traditional corporate bonds. European banks and insurance companies typically buy the higher-rated senior tranches of a CLO for inclusion in their broader fixed income portfolios. Investors with a higher risk appetite seeking bigger returns – such as hedge funds, some sovereign wealth funds and certain other funds – are active in the lower-rated bonds further down the capital stack. Turner said that the senior level of bonds in a typical European CLO — which are rated AAA — currently offer investors between 125 and 130 basis points of spread. “This is pretty good for a triple-A obligation in a very secure capital structure,” he added. Turner noted that the broader European fixed income market continues to be “pretty interesting” for investors, particularly U.S. dollar-based buyers who are receiving an “attractive” 2% pick-up in yields for hedging back into U.S. dollars. “But the whole securitization market provides good relative value, relative to the rest of fixed income at the moment as well,” he added. The floating rate nature of most CLOs means such securities also offer investors a protection hedge against interest rate risk. Europe’s CLO market has seen record new issuance in 2025, with year-to-date volumes reaching more than 48 billion euros ($55.5 billion) — just 2 billion euros short of 2024’s full-year supply, according to Bank of America research. ‘A broader range of investors’ In a note Monday, BofA analysts flagged a growing “bifurcation” in the corporate loans that underpin Europe’s CLO space, particularly toward the lower-rated, riskier end of the capital structure. “Some CLO managers have had exposure to several loans that have traded down whereas other managed to avoid many of the now stressed credits,” analysts noted in BofA’s latest ‘European CLO Weekly’ commentary. “Dispersion between tranches has increased significantly, with some managers more exposed to many of the recent distress stories than others.” Aaron Scott, a partner at Dechert in London, noted that CLOs issued since 2013 benefit from improved structural protections put in place in the years following the 2008 Global Financial Crisis — such as lower leverage, stricter ratings criteria and tougher tests on the underlying loan collateral. “As the CLO market is now a developed market which has weathered multiple downturns, a broader range of investors are comfortable with the product,” Scott told CNBC in an email. BlackRock’s stance comes as the European CLO sector looks to expand beyond the broadly syndicated loan market and into the private credit direct lending space. Just two European CLOs made up of private credit loans have been completed to date — one by Barings in November 2024, which was followed by Ares Management in June this year. The main hurdle that European CLO managers face is the ability to construct a pool of European private credit loans with enough diversity to satisfy the requirements of rating agencies. “This is particularly challenging in Europe compared to the U.S. because the EU private credit market is much smaller than the U.S. market, in part due to European banks still being very active in this space, and the loans being denominated in multiple currencies in Europe,” Scott explained.
