2025 Wrap-up and 2026 Outlook

2025 closed as another strong year for the European and Australian ABS markets despite intermittent macro uncertainty. Investors continued to demonstrate robust demand, supporting spread compression amid record issuance volumes. For 2026, we expect elevated funding needs and stable performance across core collateral types, alongside ongoing innovation in new and esoteric asset classes. Regulatory changes in Europe may further encourage issuance and broaden the investor base. Overall, floating rate securitised assets remain a compelling component of diversified fixed income portfolios, continuing to offer an attractive spread pick up to similarly rated corporates, floating rate protection, and structural resilience.

Issuance and Market Technicals

As we mentioned in our European and Australian ABS 2025 Q3 update, a strong start to 2025 was halted when broader markets faced uncertainty in early April given President Trump's tariff announcements. The ABS markets recovered relatively quickly and despite continued macro and tariff related uncertainty, demand across the capital structure continued to be strong, leading to spread compression across global ABS markets.

Sustained investor demand and relatively attractive funding levels continued to keep the asset class attractive for issuers for both funding as well as for credit risk transfer.

So...another record-breaking year for issuance? Indeed, although slightly less dramatic than in 2024. European ABS issuance closed the year just over €95bn and Australia continued momentum with another year of strong issuance for the market at just under  €41bn, the second highest year of issuance, and a little short of the record set in 2024 of €46.5, according to JPM research figures.

The supply we have seen in Europe and Australia over the last couple of years has led to an outstanding market size of just under €700bn publicly available/distributed bonds excluding CLOs. This underlines ABS as a significant sector within fixed income markets. Similarly, since the GFC, the Australian securitisation market has demonstrated steady, consistent growth, but the recent acceleration signals robust investor appetite combined with increased supply from a growing non-bank issuer base. In addition, JPM research notes that both the European and Australian markets finished the year with not just record issuance but also positive net supply: net distributed European and Australian ABS issuance reach +€19.3bn and +€6.4bn, respectively, for FY 2025.

A healthy securitisation market is one where innovation and new asset classes emerge, and 2025 did not disappoint. Europe has continued to see stable issuance from traditional mortgage and consumer collateral sectors but there was also a significant number of new deals and issuers which debuted in the market, giving investors a good source of diversity across platforms and collateral types. In Australia, while RMBS continued to dominate supply last year, non-RMBS issuance has grown significantly with sizeable volumes of auto/equipment issuance over recent years and more non-bank lenders in the consumer and SME space adding greater diversity.

Liquidity in the asset class, globally, continued to show resilience, demonstrated by secondary market depth and investor demand even through significant bouts of market volatility such as that seen in April. Some examples of this:

• April secondary volumes totaled €1.9bn in European ABS; more than double the average monthly volume during the year, demonstrating a healthy trading market while new issue markets were less active.
• European ABS (inc. CLO) trading volumes in 2025 significantly increased during 2025 - with a European year end trading desk noting this was up to 30% higher than 2024 - partly due to an increase in supply via auction lists, particularly during the April and October periods of volatility, and increasing volumes across some specific asset classes such as European Auto and Consumer ABS.
• CLO markets continue to demonstrate significant daily liquidity, particularly in the US. Weekly average trading volumes show significant activity, at €1.0bn and €0.3bn in the US and EUR markets respectively, while ETFs in this asset class have grown from €0.3bn to >€40bn over the past 5yrs, mainly focused on US AAA CLO investments.

For 2026, we anticipate the need for funding and reinvestment to continue and issuance to remain elevated. If the current environment persists all signs are pointing to the potential for another record year! We expect strong demand for the asset class to persist and increased origination in traditional consumer underlying assets as well as newer types of collateral to support growth in the asset class. Despite potential macroeconomic volatility, the sector's resilience and the stable investor base make it well placed for the sector to continue.

Asset Performance

Headline fundamentals stayed healthy in 2025 year but were accompanied by a side of tiering - both for consumer as well as levered corporate performance. Capital market volatility, macroeconomic uncertainty and credit stories such as Tricolour emerging in the US kept investors on their toes but structured finance ratings were largely stable through 2025 maintaining a stable to positive ratings drift.

Looking forward, the performance outlook for most collateral types is expected to be stable but we remain mindful of macro and interest rate uncertainty for consumer and corporate borrowers. Despite global central bank rates continuing to reduce from their 2024 peaks during 2025, interest rates are persisting in a higher for longer phase compared to pre-Covid levels, particularly as inflation has remained somewhat "sticky" during 2025. Investors should be focused on limiting risks around macro-led shocks to borrowers by analysing collateral through the interest rate cycle, keeping in mind the key issue of affordability for customers and the importance of strong, effective underwriting by issuers. Unemployment indicators continue to drift upwards and remain front of mind for investors looking for read across into consumer credit performance.

Esoteric and new asset classes were a key theme in 2025

Clearly, securitisation continues to be a key funding tool for traditional consumer and mortgage asset classes, but the past few years have seen exciting developments in new collateral types coming to market. Funding levels in structured finance are attractive for issuers and these new sectors have generally been received well by the market. Additionally, through 2025 we noted a number of new issues in sectors with positive ESG characteristics and considerations. These include solar and heat pump ABS as well as later life mortgages and transactions described as shariah compliant RMBS on the social side. EV auto financing continues to be a growing segment within Auto ABS portfolios.

Risks and Opportunities in 2026:

Macro and geopolitical risks continue:

Writing this just a couple of weeks into 2026, political and geopolitical risks continue to be front-of-mind for market participants. We expect this dynamic to persist this year and for investor sentiment to remain sensitive to developments in geopolitics, global trade policy as well as the path of interest rates in the US and in Europe.

Consumer performance: Structural protection in ABS structures mitigate risks

In Europe, consumers continue to face structural and cyclical risks, being described as financially resilient but behaviorally cautious. However, expectations for unemployment to remain broadly stable maintains a base for low and stable credit card and ABS arrears performance. We do expect tiering to continue between better quality prime collateral and more non prime lenders who support underserved borrowers. Structural protections afford to investors in securitised structures, help mitigate risk, often with increasing protection over time as transactions or assets de-lever.

Housing Market Valuations:

Asset prices, in particular housing, in the UK, Australia and Europe remain on a stable or improving trend given the consistent undersupply seen in construction of housing seen across the major RMBS markets together with continued increase in demand.

Where there has been some slowing in segments of the market, in the UK for example, with London apartment valuations facing pressure, we note that the Buy to Let RMBS performance remains consistent given stable unemployment and rental streams. Any unforeseen shock to unemployment or regulatory impacts are key to performance but, post GFC affordability regulations and appropriate stress testing of borrowers' together with stability in underwriting gives investors comfort beyond the structural features of RMBS.

Amongst and despite the risks above we note some significant opportunities for experienced investors in Global structured finance markets:

New and Esoteric Asset Classes:

As noted above, we have seen issuance beyond traditional platforms over the last couple of years emerging. The use of securitisation as a funding tool beyond "on the run" platforms is valuable to investors. New issuers to the market, including those establish issuers that diversifying their funding via securitisation, and collateral types in Europe and Australia present opportunities to earn a premium over more traditional platforms and provide diversity to portfolios. That said, we should be cognisant of potential additional risks that may need to be considered relating to new lending types as well as the short historical performance available for some types of collateral which is needed to structure, rate and stress transactions appropriately.

European Markets give investors depth, diversity and Liquidity

We continue to see opportunities in the European ABS and CLO markets with an overall size of over €600bn now, the market gives investors good relative value where diversity of jurisdictional collateral risk alongside strong historical performance. This is all within the context of a dedicated investor base and proven liquidity in the asset class.

Regulation, regulation, regulation

Regulation will remain a key consideration in 2026, particularly in Europe, where the European Securitisation legislation aims to reduce barriers to issuance and investment in EU securitisation:

• Capital Requirements Regulation (CRR) updates aim to reduce capital requirements for bank investors.
• Simplified due�'diligence for EU investors in repeat ABS issuers could lower barriers to participation.
• Reporting template reforms may ease private deal reporting burdens.
• Solvency II changes could unlock greater insurer participation.

Collectively, these developments should improve funding conditions and make securitisation more attractive to a broader investor base albeit with a fluid timeline.

Implications of the motor finance commission rulings for UK Auto ABS

The FCA consultation on motor finance broker commissions is still ongoing, but any impact on ABS has been limited and if the redress scheme is as expected, focussed on discretionary commission arrangements, we expect little to no impact on new and outstanding UK auto asset-backed securities (ABS) transactions as a negligible amount of collateral in outstanding securitised bonds would be affected.

Secondary liquidity was more challenged until more clarity was reached. Issuance in UK Auto ABS across bank and non-bank lenders, was €3.6bn in 2024 compared to 2025 where no issuance at all was seen until September, when VW opened the market and priced well with strong demand. As we noted in one of our published articles at the time we expected this to be a positive signal for UK non-bank lenders, giving them confidence in execution. Indeed, Oodle came with a Dowson transaction soon after which was taken well by the market. That said, given lower origination volumes over 2025 for the UK non bank lenders, particularly in the non prime space, funding needs may be more muted in 2026. It is also worth noting, that used car prices fell as supply of cars normalised post covid, residual values have also corrected back down; stabilising for ICE vehicles but falling sharply for EVs, where residual values proved significantly over forecast.

Looking forward to 2026:

The depth and diversity of the European and Australian markets continue to support the role of global securitised products as a strategic allocation within fixed income portfolio; enabling diversification across jurisdictions, collateral types and issuer profiles while maintaining liquidity.

Looking forward, regulatory developments, continued innovation in collateral and an expanding issuer base should reinforce market depth and opportunity, making securitised credit not merely a tactical allocation but a durable, scalable and resilient cornerstone of fixed income portfolios in 2026 and well beyond.

The investment outlook this year remains shrouded by uncertainty, accompanied by elevated volatility in expected returns. Markets are searching for direction, and investors are navigating an environment where conviction feels harder earned.

Volatility, of course, wears many faces. We can observe it in the lived experience of asset price return variability across securities, sectors and markets. Or we may deduce the anticipated range of returns over the next week, month or quarter from options prices. Either way, the direction, size and interdependencies (correlations) of movements in market pricing at all frequencies can provide important signals for astute investors. Volatility is not simply noise, it is information.

Right now, equity prices, cryptocurrencies, and precious metals are relatively more volatile. Yet in contrast, most bond markets remain curiously subdued. Yields remain broadly rangebound, only tentatively challenging the edges of recent ranges, reticent to enter an elusive new regime or steady state. That restraint in bond markets is notable, and perhaps more revealing than the visible turbulence elsewhere.

After hiking rates earlier this month, RBA Governor Michelle Bullock stopped short of offering explicit forward guidance, indicating that the Monetary Policy Board is heavily data dependent. This suggests further policy restriction may have limited efficacy in controlling persistently above-band inflation back to the target range. Australian government bond yields decreased markedly in response, and the market is paring back pricing for hikes and beginning to tentatively pre-empt future rate cuts next year. The tone has shifted, from further restriction to a growing debate about how long policy will need to remain restrictive at all.

More broadly, attention is turning to the Government for direction ahead of the upcoming Federal Budget. There is growing recognition that boosting labour productivity through innovation, enhanced competition and meaningful structural and tax reform remains the only sustainable path to higher national income and improved living standards for all Australians.

Meanwhile, across the Pacific in the U.S., economic activity continues to show surprising resilience. January brought unexpectedly strong employment growth, thanks in part to seasonal factors (despite large historical downward revisions). Price pressures, meanwhile appear to be cooling, although the data remains messy and influenced by lingering U.S. federal government shutdown-related disruptions. The result? Short-dated Treasury yields have drifted to multi-year lows, reflecting cautious optimism among investors.

The market has almost priced for three U.S. Federal Reserve rate cuts this year under U.S. Federal Reserve Chair nominee Kevin Warsh, although the upcoming midterm elections loom large over the U.S. macro outlook and the Trump administration's near-term policy priorities.

In Europe, inflation appears to be well controlled and the European Central Bank comfortably on hold, but recent geopolitical events have raised existential questions around the protection and advancement of national and regional interests, and defence and security strategy. While this may be the quintessential European moment to rebalance the world order away from U.S. dominance if traditional allegiances like NATO are set to be dissolved, there have been fundamental disagreements between Germany and France around policy priorities to restore competitiveness and how to fund quickly growing defence expenditures. Yields on German government bonds have also dropped materially in recent weeks.

In Japan, the Liberal Democratic Party lead by Sanae Takaichi has emerged victorious from lower house elections. Takaichi's expanded mandate and firm command over political and economic power (for instance, Japan's central bank is not independent of government) after her historic win, combined with a sense of renewed optimism across global markets that the realisation of her vision for Japan will not unduly impact interest rates and exchange rates beyond what is already envisaged, has led to a relief rally in Japanese Government Bonds after a tumultuous January.

What signal can we draw from the subdued historical measures of volatility across bond yields, especially when viewed against the domestic and global macro backdrop? There are three key takeaways.

First, periods of volatility and uncertainty (whether obvious or hidden) can bring significant opportunity to generate attractive returns for those who act thoughtfully. Second, fortune rewards the diligent and there are only downside risks to complacency. And third, and most importantly, diversification, both within and across asset classes and sectors is the primary means with which to dampen the effects of volatility and protect long-term investment outcomes.

Volatility may rattle markets, but it also sharpens our focus, driving better portfolio construction and smarter asset allocation decisions.

In 2025, with credit spreads normalising, and in some segments moving below long-term averages, a number of yield hungry credit investors responded by adding risk to meet investment objectives. These additional risks to sustain portfolio yields of 6%+ varied from increasing credit risk, interest/spread duration and/or leverage.

While mostly still at manageable levels, increased debt funding of credit securities is nonetheless a throwback to the heady pre-GFC era where synthetic and physical leverage was more commonplace. Indeed, we are now also hearing of less sustainable practices once again creeping into the credit investment lexicon.

From our discussions in the marketplace towards the tail-end of 2025, the use of leverage is principally occurring through the use of repurchase agreements (repo) of eligible collateral up to an eye watering 15-times for AAA rated securities, as well as via placement of senior secured leverage to enhance portfolio yields in both private and public credit portfolios.

New levered investment products that have recently entered the market offer a floating rate running yield from a portfolio likely comprised of major bank T2 hybrids (T2s) and investment grade (IG) corporate bonds. Products such as these typically seek to enhance yield by deploying 3-3.5-times leverage.

Leverage enhances yields and amplifies performance (both positively and negatively) from changes in spreads and any impairments/defaults. Working off current pricing, an IG portfolio yielding ~5.0-5.5% p.a. with ~3-times leverage moves what is an already enhanced yield into a yield in the 7%+ range (refer Chart 1).

Chart 1: YCM estimate: Levered IG portfolio yields

Source: Yarra Capital Management Feb 2026.

The use of leverage to enhance returns can work very effectively in environments of stable or contracting credit spreads. It is a double-edged sword, however, with the combination of widening credit spreads and leverage usually resulting in significant drawdowns.

For instance, working off an estimated credit spread duration of ~5 years, a widening spread environment would quickly overwhelm underlying yields, with a ~100bp spread expansion on 3-times leverage generating a negative total return in the range of 10-15% from what is an underlying low risk IG credit portfolio (refer Chart 2).

Chart 2: YCM estimate: Levered total returns and widening credit spreads

Source: Yarra Capital Management Feb 2026.

Given fixed income investors generally have a low tolerance for negative returns over a 12-month period, the use of significant leverage to enhance returns could be somewhat of a dubious exercise, especially when you consider today's starting point. As evidenced by major bank T2s, credit spreads have performed over the last 2-3 years and now sit around their long term averages across most segments of Australian credit and significantly below the previous peak in 2022 (refer Chart 3).

Chart 3: Major Bank Tier 2 5-year FRNs (credit spreads and yields)

Source: Yarra Capital Management Feb 2026.

At current spread levels, the probability of a +/-100bp move is weighted to the positive and in the current macroeconomic environment is entirely possible over the near to medium term. In such an event, which can occur two to three times each decade, the prospect of equity like drawdowns from levered credit funds should give credit investors pause for thought.

Put more simply, credit investors in these levered structures should be thinking hard about whether they are comfortable taking what is effectively equity drawdown risk for a miserly 1-2% in additional yield. We would suggest that this represents incredibly poor compensation for the risk assumed at this point in the cycle.

In contrast to levered credit funds, both the Yarra Enhanced and Higher Income Funds are still providing attractive 6-7% yields with precisely zero leverage. Moreover, while it is true that a 100bps widening in credit spreads would lead to value diminution for both these funds, high unlevered yields combined with active management should protect against negative returns over any 12-month period. We do not believe the same can be said of levered credit funds running a similar mix of underlying credit assets.