Weekly View from the Desk
Assessing Global Tariff Scenarios, Sector Implications
The State of Securitization from SFVegas
Mar 20, 2025
PGIM Fixed Income shares key takeaways about each asset class of securitized products based on the learnings made and the meetings had at SFVegas 2025.
For those seeking perspective on the tailwinds behind the securitized products sector, it was evident at the industry's recent confab in Las Vegas. With more than 10,000 global participants from an array of industry roles, the attendance alone underscored the sector's position at the forefront of a rapidly evolving credit market.
Throughout our more than 150 meetings and numerous presentations, it was evident that the lines between banking and securitization, as well as public and private credit, continue to blur. The sector's expansion beyond borders was also evident given the overseas attendees and discussions regarding non-U.S. transactions. Of course, more immediate topics, such as valuations, consumer health, AI-related investments, and tariffs were also on participants' minds as referenced throughout the following perspective on the sector's various asset classes.
Key Takeaways
- Valuations were a key theme, with general agreement among participants that spreads are tight across the entire sector.
- A strong desire to source opportunities—particularly in private, ABF-style transactions—remains.
- Issuance is also expected to continue at a strong pace across all sectors (Figure 1).
- In addition to supply and ABF opportunities, some significant credit trends were also discussed as consumer credit performance remains challenged in ABS, while CLO managers described navigating tariffs and other government policy initiatives.
Figure 1
Issuance Expected to Remain Strong Across All Sectors ($bn)
Source: JP Morgan as of February 28, 2025.
Collateralized Loan Obligations (CLOs)
- The CLO market is contending with historic levels of issuance, and some discussions focused on operational challenges at this level of issuance.
- Managers remain focused on asset sourcing, which has proved challenging. Until M&A and LBO activity picks up, leveraged loan supply is expected to come from dividend recapitalizations and refinancings of private credit deals.
- With economic policy uncertainty ratcheting higher (Fig 2), managers are scrutinizing portfolios to identify and reduce exposure to issuers exposed to tariff and government efficiency risks. Industries most exposed to tariffs are not typically large allocations in CLOs.
Figure 2
U.S. Policy Uncertainty Continues to Rise
Source: Federal Reserve Bank of St. Louis, as of March 3, 2025. Economic Policy Uncertainty Index for U.S. (USEPUINDXD)
CMBS, Specifically Data Centers1
- Despite the recent headlines around DeepSeek and Microsoft’s lease cancellations, sentiment around data center fundamentals remains positive (Fig 3). Regarding DeepSeek’s impact, most market participants expressed the view that the increased cost efficiency will lead to greater demand. Power continues to be the principal constraining factor on new supply, with several operators considering on-site generation as a bridge solution.
- Capital and financing needs in the sector continue to grow. Operators have utilized a variety of financing structures including ABS, CMBS, project finance, commercial property assessed clean energy (C-PACE), and private syndications to date. With the recent widening in CMBS data center deals, ABS execution has gotten far more favorable.
Figure 3
Global demand for data center capacity expected to rise sharply (gigawatts)*
Source: McKinsey, as of October 29, 2024. *Three scenarios showing the upper-, low-, and midrange estimates of demand, based on analysis of AI adoption trends; growth in shipments of different types of chips (application-specific integrated circuits, graphics processing units etc.) and associated power consumptions; and the typical compute, storage, and network needs of AI workloads. Demand is measured by power consumption to reflect the number of servers a facility can house.
ABS
- Consumer credit performance is still challenged, with no clear driver for improvement. Most originators discussed tightening their “credit box” to cure underperformance from 2022 and 2023 originations.
- Issuance is likely to remain strong (Fig 3), with expectations of a steady supply of private opportunities from operators seeking funding diversification. Other operators are looking to expand traditional ABS issuance to complement early-stage private financings and warehouses.
- Bank card yields remain relatively high and challengers are looking to chip away at the profitable $1 trillion market. Even a small pullback from banks would create a sizeable opportunity. However, the buy now, pay later (BNPL) lenders will challenge banks for the same customer's business.
- Banks are increasingly competing with investors for lending opportunities (e.g., fleet, whole business securitization, equipment, aircraft), and this could compress spreads and limit available supply.
- The commercial/corporate sector is not experiencing any specific weakness by industry type and lenders are avoiding the lowest-quality credits within industries.
- Commercial/corporate origination volumes by issuers have generally seen steady growth and performance has not deteriorated except for select captive finance equipment issuers with farm economy exposure.
RMBS
- Insurance companies’ interest in mortgage credit is especially evident in residential mortgage whole loans.
- Mortgage credit investors are monitoring the rise in non-qualified mortgage (QM) delinquencies, which are mostly stemming from the lower FICO and cash-out refi cohorts. However, these are not resulting in material losses due to low loan-to-value ratios and a strong housing market.
- The Wall Street Journal, “They Crashed the Economy in 2008. Now They’re Back and Bigger Than Ever,” February 28, 2025.
Related Articles
Navigating Market Volatility
Get PGIM’s latest insights and ideas to navigate heightened market volatility.
PGIM Fixed Income 2Q 2025 Outlook
In this 2Q 2025 outlook, PGIM Fixed Income shares its views on the current economic environment and outlook for fixed income markets.
For Financial Professional Use Only. Not for use with the public.
All investments involve risk, including the possible loss of capital. Past performance is not a guarantee or reliable indicator of future results. Source: PGIM Fixed Income. The information represents the views and opinions of the author, is for information purposes only, and is subject to change. The information does not constitute investment advice and should not be used as the basis for an investment decision.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
Prudential Investment Management Services LLC is a Prudential Financial company and member FINRA and SIPC. PGIM is a registered investment advisor and Prudential Financial company. PGIM Fixed Income is a units of PGIM.
© 2025 Prudential Financial, Inc. and its related entities. PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
For compliance use only 4092674