Key takeaways:
- Post-GFC reforms have made ABS structures significantly more resilient and transparent. These changes have contributed to zero investment-grade ABS defaults since 2010 and have created a more robust, standardized market framework.
- Multiple layers of credit enhancement work together to help protect investors – even in stressed environments. Key mechanisms absorb losses long before senior tranches are threatened, while deals naturally de-lever over time, increasing credit enhancement as principal amortizes.
- Recent rating agency actions highlight the effectiveness of these protections. In 2025, both Moody’s and KBRA issued multiple ABS upgrades across auto loan
transactions, citing increased credit enhancement. Even amid rising delinquencies in some sectors, structural protections proved sufficient to support stronger ratings and demonstrate the durability of modern ABS structures.
ABS have historically weathered crises with lower default rates and shallower drawdowns than corporate bonds, making them a potentially attractive relative value play. Such resilience is not accidental; it stems from a disciplined framework that evaluates collateral quality and embeds multiple layers of credit enhancement, which can vary depending on the underlying collateral.
In an ABS transaction, sponsors transfer the underlying loans or receivables to a special purpose vehicle (SPV) that passes along the cash flows generated by the collateral to investors. The legal structure prioritizes ABS investor claims over other creditors and is bankruptcy-remote from the sponsor.
While credit enhancements may serve as safeguards against potential losses, it’s important to understand that issuers and rating agencies assess the credit risk of the underlying asset pool before an ABS transaction is even structured.
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IMPORTANT INFORMATION
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss. Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment.
Asset-backed securities (ABS) are financial investments backed by a pool of income-generating assets like loans, leases, or credit card balances.
Concentrated investments in a single sector, industry or region will be more susceptible to factors affecting that group and may be more volatile than less concentrated investments or the market as a whole.
Diversification is a common investment strategy that entails buying different types of investments to reduce the risk of market volatility.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Securitized products such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Definitions
The Bloomberg U.S. Aggregate Asset-Backed Securities (ABS) Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index only includes ABS securities.
A credit spread is the difference in yield between two debt securities with different credit quality but the same maturity.
Credit quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). The S&P 500 Index or Standard & Poor’s 500 Index is a market-capitalization weighted index of 500 leading publicly traded companies in the U.S.
Investment-grade securities: A security typically issued by governments or companies perceived to have a relatively low risk of defaulting on their payments. The higher quality of these bonds is reflected in their higher credit ratings when compared with bonds thought to have a higher risk of default, such as high -yield bonds.
Loss given default (LGD) is the amount of money that a bank or other financial institution is projected to lose when a borrower defaults on a loan.
Probability of default (PD) is the probability of a borrower or debtor defaulting on loan repayments. Within financial markets, an asset’s probability of default is the probability that the asset yields no return to its holder over its lifetime and the asset price goes to zero. Investors use the probability of default to calculate the expected loss from an investment.
A Special Purpose Vehicle (SPV), also known as a Special Purpose Entity (SPE), is a separate subsidiary formed by a parent company to isolate and manage financial risks. By operating independently, SPVs secure obligations even in the event of a parent company’s bankruptcy.
Tranche: In securitized products, a tranche is one of a number of related securities offered as part of the same transaction, with each representing a different degree of risk and carrying a commensurate credit rating.
Related insights
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
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- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
- The Fund invests in Asset-Backed Securities (ABS) and other forms of securitised investments, which may be subject to greater credit / default, liquidity, interest rate and prepayment and extension risks, compared to other investments such as government or corporate issued bonds and this may negatively impact the realised return on investment in the securities.