Asset-Backed Securities Quarterly Update – October 2022

October brought the first serious bout of volatility in corporate bond markets for some time, with two high-profile US bankruptcies raising fears of a more systemic issue in credit. We anticipate more such defaults in the coming months, though we expect they will remain isolated cases given fundamentals across the market still look healthy.

Economic data this week will be weird, and for central bankers it might not be wonderful. In the US, not only will we endure the aberration of non-farm payrolls (NFP) data being published on a Thursday, but we’ll also get several late macro data releases with the government shutdown put off until at least January.

For some time now, collateralised loan obligations (CLOs) have in our view been one of the standout risk-adjusted opportunities in all of fixed income, and in recent years (including this one) their performance has lived up to that billing.

In 2017, when the Federal Reserve (Fed) was preparing to shrink its balance sheet, then-chair Janet Yellen famously described the process of quantitative tightening (QT) as being "like watching paint dry."

This year will go down as an important period for the European insurance sector, which is concluding its effort to phase out capital instruments issued under the old Solvency I framework and replace them with more modern Solvency II structures.

There is an emerging sense of unease in the markets around the scale and productivity of corporate investments in AI. As fixed income investors, not equity or tech managers, we will not aim to assess the longevity or possible applications of these nascent technologies, and nor should we opine on when or by how much equity markets might go up or down.