Senior CLO Liquidity: A Class of its Own

Consistent and Resilient Secondary Market—Especially When it Matters Most

Supported by dozens of global market-making dealers, senior CLO tranches (i.e. those rated AAA and AA) consistently see robust secondary market trading volumes across varying market conditions. As such, senior CLO bonds often serve as a critical source of liquidity, particularly during periods of market stress when senior CLO trading activity tends to increase (Exhibit 1), highlighting their liquidity.

Exhibit 1

Senior CLO trading volumes historically increase during periods of stress (Daily CLO TRACE Volume as of September 30, 2025)

During the 2020 pandemic-driven dislocation when most fixed income markets froze, U.S. AAA CLO tranches continued to actively trade, making them one of the few assets investors could readily sell with transparent market valuations. The same dynamic repeated during the regional banking crisis and again in early 2025 during the U.S. tariff-induced dislocation. European AA CLOs were similarly tested during the 2022 LDI crisis in the U.K., there too proving to be a reliable source of liquidity in a volatile market environment. In addition, over the past decade senior CLO tranches have exhibited lower price volatility—on both an absolute and relative basis—during dislocations (Exhibit 2).

Exhibit 2

Senior CLO spreads have remained stable across market dislocations and credit cycles

Looking at a more recent example, prior to April’s tariff-related broad market volatility, spreads on many CLO tranches were trading near historical tights as credit curves remained flat. When tariff concerns hit in April, spreads widened and credit curves steepened. AAA CLOs again proved most resilient, outperforming lower-rated tranches. Indeed, given the minimal credit risk in AAA CLOs, the spread widening in this segment was largely technical as investors seeking liquidity turned to the asset class.

Exhibit 3

As senior CLO trading volumes rise, spread volatility is historically unchanged

Having passed these market stress tests, senior CLOs continue to attract greater attention from asset managers seeking to supplement portions of their portfolios with liquid fixed income solutions that offer risk-adjusted yield premiums. Meanwhile, CLO ETFs—representing only about three percent of the total $1 trillion-plus CLO market—have experienced remarkable growth in recent years (Exhibit 4). While still in their early stages, CLO ETF are poised to further expand the senior CLO buyer base.

Exhibit 4

CLO ETFs expand the investor-base of senior CLOs

So How Much Trading Actually Occurs?

In the U.S. last year, more than $230 billion traded in the secondary market, which is more than 20% of the entire U.S. CLO market. In addition, gross issuance in the U.S. primary market exceeded $544 billion, resulting in over $3 billion a day trading across both primary and secondary markets.

TRACE data are not available in European markets, but BWIC activity in European CLOs provides an indicator of secondary market volumes. We estimate that roughly 25% of trading occurs on BWIC, therefore, we believe European secondary trading volumes were around €65 billion last year. This implies a turnover rate of roughly 25% for the broader European CLO market. This secondary market activity, paired with an additional €125 billion in the European CLO primary market, implies total daily trading volumes of approximately €750 million per day (see Exhibit 5 for a breakdown of monthly primary and secondary volumes).

Taken altogether, sizeable U.S. and European volumes highlight the depth of the global CLO market, demonstrating that CLOs are far from being static, buy-and-hold instruments with limited liquidity. To the contrary, this sustained turnover across market cycles highlights the meaningful liquidity available to CLO debt investors.

Exhibit 5

Global markets are a source of CLO liquidity

Structured for Liquidity Across All Market Environments

As one of the most liquid fixed income instruments, the historical ability of senior CLO bonds to remain tradable in nearly all market environments stems partly from their high capital structure seniority and strong structural protections. A key safeguard in CLOs is the overcollateral-ization (OC) test, which measures the ratio of underlying loan assets to outstanding debt to ensure sufficient support for the structure. Stress in the loan pool, such as defaults or downgrades, can push this ratio below required levels.

When that happens, cash that would normally flow to lower tranches is instead redirected, or “trapped,” to pay down the senior tranche. This self-healing mechanism, which returns cash to senior investors during periods of stress, enhances both liquidity and protection (please see Exhibit 6 for an example of an OC test).

Beyond the portfolio liquidity benefits, senior CLOs tranches can enhance risk-adjusted return expectations and help maintain or improve portfolio credit quality over the long term. For more than a decade, the credit ratings of CLOs—especially senior tranches—have remained steadfast through credit cycles, as well as several broader market dislocations and macro events.

Importantly, while this feature is a benefit for all debt holders, it has historically benefited AAA CLOs the most as they receive a return of principal payment at $100 (par) during market stress. As tranches become more subordinated, the benefit quickly dissipates, resulting in different liquidity profiles. Thus, while liquidity in senior tranches is quite robust, mezzanine tranches have a different liquidity profile.

Owing to their structural protections, consistent secondary market liquidity, and portfolio advantages, senior CLOs have remained a common allocation in PGIM’s fixed income portfolios over multiple market cycles. Our team has managed senior CLO tranches in client portfolios for nearly two decades. Today there is broad, firm-wide conviction to CLO investing with strategic allocations established for many of our bespoke and multi-sector strategies.

Exhibit 6

Broad market stress, credit events triggered OC test failures during the GFC