The appeal of securitised credit: A closer look
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers, and providers from across the market.
Many investors already have significant exposure to sovereign, corporate and long-duration risk through traditional fixed income allocations. In an environment where long-duration assets are more vulnerable to rising rates, securitised credit offers differentiated exposure thanks to its floating-rate nature, shorter duration and diversified underlying assets. In this Focus guide, Sid Chhabra and Tom Mowl of RBC BlueBay Asset Management explore the investment case for securitised credit and explain how the team is positioning portfolios across ABS, RMBS and CLOs. Learn where they see value in the asset class, the risks worth watching and why careful credit selection remains central to long-term performance.
IN THIS EDITION
For professional investors only.
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OUTLOOK
Will securitised credit continue to outperform as issuance and volatility increase?
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Floating-rate exposure, short duration and diversified underlying assets are enhancing the appeal of securitised credit in today's volatile market environment. But can the asset class continue to deliver as issuance grows, and uncertainty persists?
Perhaps more importantly, the current environment of higher energy prices and interest-rate volatility has highlighted some of securitised credit's key strengths. Floating-rate exposure, short duration and protection from single-name credit risk make the asset class particularly attractive today, according to Sid Chhabra, Head of Securitised Credit, CLO Management & European High Yield at RBC BlueBay Asset Management. Many investors already have significant exposure to sovereign risk, corporate risk and long-duration risk through traditional fixed income allocations. But in an environment where long-duration assets are clearly affected by the risk of rising rates, securitised credit offers a differentiated exposure, Chhabra says.
Securitisation provides access to risk profiles that investors might not otherwise own, such as consumer risk, through exposure to underlying assets ranging from mortgages and auto loans to credit card receivables and other forms of household borrowing. The performance of these assets is driven by very different factors from corporate earnings, giving investors exposure to risk drivers not found elsewhere in fixed income. Structurally, many securitised assets are collateralised and have floating-rate coupons, meaning investors' income can rise alongside interest rates. “Compared with corporate credit, which is often unsecured, or other areas such as private credit where there can be greater concentration risk, securitised credit tends to offer much broader diversification within public markets,” says Chhabra. Some sub-sectors within securitised also tend to have lower spread duration than traditional fixed income assets, as principal is often repaid throughout the life of the underlying loans rather than at maturity. An auto loan, for example, is typically amortised over time, reducing the outstanding balance and, in turn, the investor's exposure. Another attraction is valuation, as investors can often access wider spreads than similarly rated corporate bonds while benefiting from diversified pools of underlying assets, says Chhabra. Taken together, those characteristics explain why investors are increasingly looking to add securitised credit to their portfolios. They get exposure to a diversified pool of assets, higher income as rates rise and little direct exposure to energy-price shocks. And for those investing in the investment-grade parts of the capital structure, there is significant protection against idiosyncratic credit events. As Chhabra puts it: “I have a lot of sovereign risk, I have a lot of corporate risk, I have a lot of long duration risk. What can I bring in that can provide something different?”
Advantages in choppy markets
You can have a good structure, but if the underlying assets are poor, the structure alone will not protect you
FUND FOCUS
THE INTERVIEW
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Asset quality is still key
One of the reasons securitised credit has performed well through different market cycles since the global financial crisis is that lending standards have generally been disciplined and the underlying assets have been well structured and well collateralised, according to Chhabra. The lessons of the global financial crisis were also about the importance of understanding the quality of the underlying loans and borrowers. “You can have a good structure, but if the underlying assets are poor, the structure alone will not protect you,” Chhabra says, adding that investors are much more sophisticated in how they analyse the market nowadays. And for investors willing to do the work, the opportunity set continues to expand. This year, there has been a significant amount of primary issuance across US and European markets. New issuance volumes in European asset-backed securities’ (ABS) year-to-date hit US$21bn at the end of April, more than double the volume seen at this point in 2025, according to RBC BlueBay. Looking ahead to the second half of 2026, Chhabra does not expect smooth sailing and believes drawdowns over the next year are likely. These periods of volatility, however, can create opportunities for active investors, he says. Some of the features of the securitised market is that a large part of the investor base consists of long-term investors such as banks and insurance companies, many of which operate with fixed allocation budgets and invest steadily throughout the year. They are not necessarily making tactical decisions about when to add risk or reduce exposure, and, as a result, many of them buy and sell in a relatively predictable way, says Chhabra. “That creates opportunities for us. When valuations become expensive and spreads tighten, we can reduce exposure to higher-beta assets and position portfolios more defensively. When volatility returns and spreads widen, we can lean back into risk,” Chhabra says. According to Chhabra, the next 12 months are likely to offer two sources of potential upside: a large and diverse flow of primary issuance and periods of market volatility. But the outlook for the asset class is constructive beyond 12 months too, he says. “As securitised credit continues to gain broader acceptance among investors and allocations increase in the market environment we are seeing today, there is a strong case for continued growth over the next 12, 24 and 36 months,” concludes Chhabra.
Sid Chhabra, Head of European High Yield, Securitised Credit and CLO Management
Investors get exposure to a diversified pool of assets, higher income as rates rise and little direct exposure to energy-price shocks
Sid Chhabra, Head of Securitised Credit, CLO Management & European High Yield
ecuritised credit was once associated primarily with subprime mortgages, but today it is a multi-trillion-dollar asset class and a familiar part of institutional portfolios.
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Learn more about our funds
RBC BlueBay Investment Grade Asset-Backed Credit Fund
RBC BlueBay High Grade Short Duration Asset-Backed Credit Fund
Senior Portfolio Manager Tom Mowl discusses how RBC BlueBay Asset Management builds its securitised credit portfolios, how the team is currently positioned and where it sees opportunities and risks across ABS, RMBS and CLOs.
Would you hold it for life? The discipline behind RBC BlueBay’s securitised credit approach
We manage several different strategies in securitised credit that invest across asset types, regions and up and down the capital structure, offering different risk/return profiles for investors. Our High Grade and Investment Grade Asset Backed Credit Funds are daily liquidity vehicles that offer investors diversified exposure to the more senior parts of the capital structure. The High Grade Short Duration Asset Backed Credit Fund is designed to be a cash enhancement vehicle for investors, offering a 100bps target over cash rates. The strategy has diversified exposure to predominantly AAA rated, floating rate securitised assets with a short spread duration around 1.5 years. The Investment Grade Asset Backed Credit Fund targets 200-250bps over cash and offers diversified exposure to IG rated bonds in the securitised credit market, with a typical average rating for the fund of A+/AA-. Both funds are actively managed, with a deep focus on diligent credit underwriting and relative value opportunities, and have delivered top of the peer group performance since inception.
Can you give us a quick overview of the strategies?
Tom Mowl, Senior Portfolio Manager
Both funds are actively managed, with a deep focus on diligent credit underwriting and relative value opportunities
Investors generally use the two strategies for different purposes. The High Grade Short Duration Fund is primarily used as a cash-enhancement vehicle. Investors are looking for a low-volatility strategy with very high credit quality, while generating a meaningful pickup over cash. The Investment Grade Fund is often used as a complement to traditional investment-grade corporate bond allocations. The portfolio currently has an average rating of around A+ to AA-, with a spread duration of roughly two to three years. Investors can therefore access a very high-quality portfolio while still benefiting from the additional spread available in securitised credit markets.
How do investors typically use the High Grade Short Duration Asset Backed Fund and Investment Grade Asset Backed Fund?
The securitised credit asset class offers inherent benefits that distinguish it from other fixed income opportunities. Spreads in IG securitised are wider than IG corporates, for example looking at a single A rated European CLO spreads are over 100 bps wider than a single A rated corporate bond. In addition to the wider spreads, the credit quality remains very strong with consistent ratings upgrades, robust structures and generally strong performance across most sub-asset classes. The predominantly floating-rate nature of these assets is particularly attractive in a volatile rate environment. However, elevated market supply is keeping spreads wider prompting a balanced stance across our strategies, with some portfolios positioned more defensively. We're currently biased toward shorter duration and higher ratings relative to our neutral portfolio. The neutral portfolio is unique to each strategy and is a longer-term expectation of how each fund would be positioned across asset types and rating bands, it is a framework we use in our portfolio construction. This defensive tilt naturally translates to lower CLO allocations. CLOs carry higher spread-duration and beta characteristics; accordingly, our High Grade Fund carries a lower neutral CLO allocation than our Investment Grade Fund. One of the questions we always ask ourselves is: if we buy an investment today and imagine there is no liquidity, would we be comfortable holding it for its entire life? In other words, are we confident that we will be repaid from the underlying cash flows, whether those come from loans, mortgages or consumer receivables? Once we are comfortable with that answer, portfolio construction becomes about managing technical factors such as supply and demand and relative value. When I say we are underweight CLOs, it is not because we are concerned about the credit quality of investment-grade CLOs. The underweight position is more a reflection of relative value and technical considerations. Spreads remain attractive relative to corporate credit, both in investment grade and high yield, but CLOs are typically longer spread duration then other Securitised Credit investments.
Where is the value today and how are the strategies currently positioned?
Where we are overweight today is ABS, particularly consumer-related ABS rather than mortgages. A large part of that market consists of auto finance transactions. We like ABS for several reasons. First, it provides exposure to differentiated risk factors through consumer lending. Second, the underlying collateral typically has much shorter duration than mortgages. A mortgage may run for 25 or 30 years and requires structural features to manage that duration risk. Auto loans, by contrast, are usually much shorter, often three to five years. As a result, ABS transactions amortise more quickly, de-lever over time and become less risky as principal is repaid. That structural feature fits well with our current preference for shorter-duration assets. Most of the market is prime lending and investors also benefit from the security of the underlying vehicle. If a borrower stops making payments, the vehicle can be repossessed. That combination of prime consumer exposure, an asset that is important to the borrower and the additional collateral protection makes the sector attractive from our perspective. Even within ABS, however, we are still highly selective. One area we have spent a lot of time analysing is residual-value risk, particularly in electric vehicles. We are not trying to predict what the value of an electric vehicle will be in three, four- or five-years’ time. That is not really our role as securitised credit investors. Instead, we prefer structures that minimise that exposure to the ultimate value of the vehicle. For example, we favour fully amortising loans that repay principal over the life of the transaction and do not rely on large balloon payments at maturity. Those structures reduce residual-value risk while also accelerating the de-risking of the transaction.
What areas of the securitised credit market are favoured?
An area where we have been structurally underweight for a long time is CMBS. The European CMBS market is relatively small and not as developed as the US market. In the US, parts of the sector have faced challenges over recent years, particularly office-related assets following the pandemic. Even beyond offices, some commercial real estate loans originated during the low-rate environment were highly leveraged. As those loans come up for refinancing in a much higher-rate environment, some borrowers are facing difficulties. That has created pressure in parts of the market, even where the underlying property fundamentals have been relatively strong. Where we do invest in commercial real estate exposure, we generally prefer logistics assets and more diversified portfolios. RMBS is slightly different. We have been underweight RMBS recently, but that has largely been a relative-value decision rather than a reflection of concerns about mortgage credit quality. At the portfolio level, if you choose to overweight one area, something else has to be underweight. More recently, we have been moving closer to a neutral allocation in RMBS as we have reduced our CLO exposure. As for CLOs, we are waiting for more compelling opportunities. Those opportunities could come from continued primary-market supply or from periods of volatility in secondary markets. If that happens, we may become more constructive again. But, all else being equal, we expect the overweight to ABS to remain in place.
Which areas of the market are you cautious on?
One of the questions we always ask ourselves is: if we buy an investment today and imagine there is no liquidity, would we be comfortable holding it for its entire life?
At times, the market for Structured Credit Securities may dry up, which could make it difficult to sell these securities or the fund may only be able to sell them at a discount. There may be cases where an organisation with which we trade assets or derivatives (usually a financial institution such as a bank) may be unable to fulfil its obligations, which could cause losses to the fund. Structured Credit Securities in which the fund may invest may not be at the most senior level of the debt issued by the relevant issuer and, accordingly, the fund may be exposed to the risk that its claims on the asset pool of any such note are subordinated to other creditors in the event of an insolvency of any such issuer, meaning in turn that the fund could sustain losses in such circumstances if it were unable to recover its original investment.
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KEY RISKS
Structured Credit Securities are often exposed to prepayment and extension risks that may have a substantial impact on the timing and size of the cash flows paid by the underlying pool of financial assets. In the case of prepayments, this may negatively impact the return of the fund as the income generated will have to be reinvested at the prevailing interest rates which may be lower. Conversely, extension risk tends to increase when interest rates rise as the prepayment rate decreases causing the duration of Structured Credit Securities to lengthen and expose investors to higher interest rate risk. RBC BlueBay could suffer from a failure of its processes, systems and controls – or from such a failure at an organisation on which we rely in order to deliver our services – which could lead to losses for the fund.
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For further terms related to the objective, investment policy and overall risk and reward profile please refer to the key investor information document.
Inside RBC BlueBay's securitised credit playbook
Two funds, two objectives
Cash +100bps Predominantly AAA-rated c.1-1.5 years Cash enhancement vehicle
High Grade Short Duration Fund
The High-Grade Short Duration Fund is primarily used as a cash-enhancement vehicle. Investors are looking for a low-volatility strategy with very high credit quality, while generating a meaningful pickup over cash. The Investment Grade Fund is often used as a complement to traditional investment-grade corporate bond allocations. Investors can access a very high-quality portfolio while still benefiting from the additional spread available in securitised credit markets.
Positioning for uncertainty
Where is value today
1
Investment Grade Fund
Cash +200-250bps Investment grade only (BBB and above) c.2-3 years Complement to traditional corp bond allocations
Bluebay is currently biased toward shorter duration and higher ratings relative to its neutral portfolio. Whilst overall risk is lower versus the neutral, high supply is expected in Q3 and for the rest of the year which is likely to result in attractive opportunities to add risk.
CLOs: Robust fundamentals, but elevated issuance and longer spread duration CMBS: Refinancing concerns, ongoing challenges in certain commercial real estate segments
The structural advantages of securitised credit
Securitised Credit
Exposure to consumer credit (differentiation vs corporate and sovereign credit)
Spread premium versus comparable corporate credit
Amortising structures that de-risk over time
Diversification across large pools of underlying borrowers
Lower correlation to traditional fixed income sectors
Floating-rate exposure
Current positioning
Overweight
TARGET RETURN
SPREAD DURATION
ASSET RATING
USE
Neutral
Underweight
ABS: Consumer-related exposure, shorter duration, faster amortisation, strong underlying borrower performance
RMBS: Relative-value decision rather than a reflection of concerns about mortgage credit quality
Higher quality bias
Shorter duration
Higher in the capital structure
More defensive stance overall
