European ABS 2026 Outlook
Back
Article Type
Insights
Topics
Long-Term Outlook, Opinion, Alternative Fixed Income
Published
December 17, 2025
Read time
14 mins
Author
Egbert Bronsema
PDF
Download
Share

The European Asset-Backed Securities (ABS) market finished 2025 on a high note, defying geopolitical and economic headwinds. As we look ahead to 2026, fundamentals remain solid, technicals supportive, and valuations attractive despite a backdrop of macro uncertainty.

Resilience amid uncertainty in 2026

Macro environment brings slower growth and softer inflation

 

The macroeconomic picture for 2026 is one of cautious optimism. Growth is expected to be around 1%, supported by fiscal expansion. Inflation should soften as energy prices fall and labor markets cool, potentially dipping below target. Still, wage pressures fueled by persistently low unemployment could keep inflation near target.

 

Markets anticipate an ECB rate cut to 1.75%, though policymakers remain vigilant. Rate relief would ease borrowing costs for businesses and households, providing a tailwind for credit markets.

 

Although somewhat softer, labor markets remain tight, with high savings and strong balance sheets, cushioning households. Job openings are cooling, but unemployment is unlikely to spike. Geopolitical risks such as Russia-Ukraine tensions and global trade policy will continue to linger. A ceasefire could boost sentiment and trade flows, but uncertainty will persist. Flexibility and caution remain essential.

 

ABS Market: Strong positioning for 2026

 

ABS enters 2026 on solid footing. Issuance is expected to match or surpass 2025 levels, supported by auto ABS, RMBS, and CLO activity. Spreads remain attractive relative to corporates, helping sustain investor demand. Short-duration exposure continues to appeal amid uncertainty, with one rate cut currently being priced in.

 

Performance is expected to remain strong. Consumers locked in lower rates previously, and the combination of low unemployment and healthy savings provides a buffer against higher borrowing costs.

 

CLOs face a late-cycle corporate credit backdrop in 2026. Defaults may edge up higher, and spreads could widen slightly from 2025’s levels. However, outright defaults are likely to be tempered by amend-and-extend solutions, reducing systemic pressure.

 

CLO managers remain proactive, trimming CCC exposure and maintaining structural headroom. Issuance in ABS will be driven by bank funding needs, and as long as yields remain attractive, demand should persist.

 

Even after recent tightening, ABS offer a solid pickup over similarly-rated corporate bonds and technicals remain supportive.

 

ABS market ends 2025 on solid ground

 

What started as a year clouded by uncertainty, ended with fundamentals proving remarkably resilient. Defaults stayed well below expectations, reinforcing confidence in the asset class. Even record-breaking issuance could not dent technical strength thanks to sustained investor demand.

 

Returns were largely driven by carry, but spreads told a more nuanced story. Non-senior tranches tightened significantly, while senior tranches finished wider than where they started. Despite this divergence, valuations remain attractive, especially when compared to similarly-rated corporate credit.

 

ABS benefited from strong consumer fundamentals like healthy household balance sheets, wage growth, and savings buffers. While pockets of weakness emerged in sectors such as UK non-conforming and German consumer ABS, they were well contained and defaults remained low. Overall, the strong consumer credit backdrop supported robust collateral performance.

 

Collateralized Loan Obligations (CLOs) were a standout performer. Cumulative defaults in underlying collateral came in at just 2.6%, comfortably below historical norms. While fundamental performance varied by manager, active portfolio management made all the difference. CCC buckets shrank, and overcollateralization cushions strengthened, demonstrating proactive risk mitigation.

 

Spreads and returns driven by carry

 

Carry dominated returns in 2025. Most senior tranches widened compared to the start of the year, while non-seniors compressed amid strong demand, particularly for STS-compliant ABS structures. 


  
Spreads: Senior ABS (in basis points)

Source: Aegon AM, data as of Q4 2025

 

Sub-investment-grade tranches continued to offer relative value versus high-yield corporates, making them an attractive option for yield-seeking investors.

 

Spreads: Non-senior ABS (in basis points)

Source: Aegon AM, data as of Q4 2025

 

Record levels of issuance were met with strong demand

 

Issuance hit new post-GFC highs with €160 billion of new issuance. CLO new issuance reached €60 billion, complemented by €50 billion in refinancing and resets. After accounting for calls, net growth stood at €40 billion. ABS and RMBS issuance totaled €90 billion, adding €25 billion in net growth. The European structured credit market expanded by €65 billion overall, reaching €650 billion in size. 

 

European ABS Issuance (in bln €)

Source: Aegon AM, data as of November 2025

 

Despite this flood of supply, technicals remained robust. Investor appetite absorbed issuance efficiently, underscoring the market’s depth and strength.

 

Conclusion: Attractive relative value amid uncertainty

 

Despite macro uncertainty and geopolitical risks, structured credit heads into 2026 from a position of strength. Fundamentals remain solid, technicals look supportive, and valuations attractive relative to corporate credit. While late-cycle dynamics call for some caution, proactive management and structural protections underpin resilience.

 

For investors seeking diversification, yield pickup, and strong collateral performance, ABS and CLOs continue to offer attractive opportunities in the year ahead.

 

Disclosures

Author

Egbert Bronsema
Senior Portfolio Manager
Egbert Bronsema is a portfolio manager in the European ABS team. Prior to joining the firm, he worked for eleven years as a portfolio manager and an analyst in the structured finance team at IMC Asset Management. 
View profile
Related Articles
View all Aegon insights