What next for European ABS post-tariffs?

Markets settled down last week thanks to the absence of headlines around tariffs. There is a universal acceptance that uncertainty and volatility will remain (President Trump resumed his attack on the Federal Reserve chair, Jerome Powell, on Monday), though a series of constructive data prints relating to inflation and labour markets have now been navigated, and investors are shifting their focus to how central banks will weigh up the growth and inflationary impact of tariffs at the next round of meetings.

The relative quiet on the tariff front presents us with an opportunity to analyse how the European ABS market has fared in recent weeks, and what that might mean for the weeks and months to come.

Here’s what we’ve learned.

High correlation but better performance than other credit markets

We have noted before that post-quantitative easing (QE) we expected there to be a higher degree of correlation between ABS spreads and other credit markets, specifically during periods of generic global volatility (as opposed to credit risk driven episodes). The European ABS market has become larger, more mature and more broadly held, and this creates a paradigm shift in behaviour. As a growing market with issuers becoming slowly more programmatic as well, we are seeing fewer periods where a dry primary market creates a strong positive spread technical in itself.

As the table below shows, European ABS joined in the spread widening across credit in the wake of “Liberation Day” on April 2. More correlated credit spreads did not mean equal performance, however. With rates continuing to be a key source of volatility, floating rate European ABS has seen less volatile performance than broader credit markets, and its shorter credit duration versus corporate indices has also been supportive.

Liquidity has been strong

Secondary market selling has picked up as one would expect (ABS and CLO auction volumes for April 1-17 totalled $3.3bn, versus the $2.4bn monthly average across February and March). However, there has been no shortage of buyers evident among banks and asset managers, and the cost of trading has been only marginally above average. There has been noticeable hedge fund selling of sub-investment grade paper, primarily focused on high-coupon consumer ABS, likely motivated by margin calls for these levered investors.

We have been further impressed with liquidity in AAA CLOs (both US and EU), and UK prime RMBS and top-tier German auto ABS (names like VW, Mercedes, BMW) once again proved to be the go-to for trading in maximum size and at minimal cost. Australian ABS has also shown resilience. However, we have been disappointed with AAA continental consumer ABS; despite being short dated, spreads in this sector disproportionately softened and an overall lack of depth was evident, including rather poorly from the issuing banks themselves.

Quality paid off

We had felt in recent months that tighter spreads had also seen an unhealthy compression in the basis between higher and lower quality paper. This was evident in UK RMBS with debut issuers pricing flat to established ones, while we saw a small esoteric Irish CRE deal price far too close to consumer ABS for our liking and fourth-quartile CLO managers materially close the gap to top-tier managers. While there is nothing particularly unique here to ABS, staying disciplined and patient on credit quality will have paid off for the investors that did so, and the potential for growing premiums in such areas may now present a more compelling entry point than earlier in 2025.

Fundamental impact uncertain, but likely not a game-changer

We do not foresee an immediate fundamental impact in European ABS collateral performance, though we do expect corporate performance to trend lower than previously expected over time, seeping into leveraged loan defaults and consumer performance ultimately. That said, ABS is well equipped to deal with this, with large and diverse pools of underlying assets reducing the overall impact, and it takes time for deteriorating corporate performance to feed through into the labour market and then arrears, especially for prime consumer deals. We would also note that over the past 10 years European consumers have averaged a savings rate of 12% (versus 6% in the US), creating a meaningful buffer. As for CLOs, tariff-hit sectors such as manufacturing and auto parts make up only a tiny proportion of pools, though in the US we do expect defaults to pick up, so targeting industry exposures and strong CLO managers is going to be key.

Primary market will re-open

Last week we saw the first benchmark European ABS print post-April 2, with Mercedes bringing an upsized €700m German auto ABS deal that was 1.7x oversubscribed. If ever there were a signal that issuers should not deep-freeze their issuance plans, it was this. We are aware of several other deals with potential to move ahead post-Easter, and we expect the market to be receptive. Since the start of the year we have maintained the view that credit spreads would widen by year-end, including in ABS, and with volatility likely to persist in the coming months we see little benefit for issuers in delaying plans.

We have been very active in recent weeks across the risk spectrum, and while we do not feel radical changes in approach are warranted, we see more active secondary markets and steepening credit curves presenting a range of new opportunities for investors to add value.