Why securitised credit is gaining relevance

PERIODS of market transition often prompt investors to re-assess the foundations of their portfolios. As global markets adjust to a new phase of the interest rate cycle, many investors are re-examining how best to position portfolios for income, diversification and resilience.

As volatility becomes a persistent feature of markets, investors are increasingly seeking assets that can deliver stable cash flows while limiting sensitivity to interest rate movements.

Against this backdrop, securitised credit has been drawing renewed attention for its ability to deliver stable income, diversification and potential for relatively higher returns over time versus market volatility, particularly when compared with traditional fixed income portfolios.

Safe harbour?

Securitised credit – also referred to as securitisations or asset-backed securities (ABS) – are types of bonds that are backed by pools of underlying financial assets such as residential and commercial mortgages, car loans or corporate loans.

Unlike conventional corporate bonds, where returns depend primarily on the issuer’s balance sheet, cash flows from securitised credit are generated by these underlying assets. This ties performance more closely to asset-level fundamentals and reduces sensitivity to broad market movements.

Many securitised credit instruments also pay floating-rate coupons, allowing income to adjust as interest rates change. For the most part, floating-rate securitised credit can be a good diversifier within a fixed income portfolio as it typically provides higher returns with lower volatility given its low-duration characteristics, compared with traditional fixed income.

In terms of valuations, securitised credit also has an edge over traditional fixed income. The three largest securitised credit sectors – collateralised loan obligations (CLOs), commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS) account for approximately 75 per cent of all securitised credit outstanding. They are strong examples of how securitised credit compares to similarly rated corporate bonds on a valuation basis.

What the global financial crisis revealed

Despite these structural advantages, securitised credit has faced periods of significant scrutiny in its history. The asset class became a household name during the global financial crisis of 2008, following the collapse of the US housing market. Losses in certain segments – most notably sub-prime RMBS and highly leveraged structures – placed it at the centre of the crisis narrative and left a deeply damaged reputation.

However, losses during the crisis were heavily concentrated in securities backed by poor-quality collateral, weak underwriting practices and excessive leverage. Other parts of the securitised credit market proved considerably more resilient, with many higher-quality and senior tranches continuing to generate cash flows and experiencing loss rates comparable to – and in some cases significantly lower than – traditional corporate credit over the same period.

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These contrasting outcomes demonstrate that performance in securitised credit depends less on the asset class itself, and more on how it is structured, underwritten and governed.

Why securitised credit matters today

Securitised credit has evolved significantly since the global financial crisis. Over the past 18 years, regulators and policymakers have introduced extensive legislation and reforms across the financial system.

Stronger regulatory oversight, improved transparency and more rigorous underwriting standards have reshaped how risk is assessed across the market, providing investors with stronger safeguards and clearer visibility into underlying risks and opportunities.

Though investors should remain mindful of the risks associated with the asset class such as credit risk, liquidity risk, complexity of the structures involved, and the potential for loss of capital, these developments have reinforced the asset class’s inherent strengths.

These include asset-backed cash flows, floating-rate income and structural diversification. They enhance the relevance of this asset class in an environment of market volatility and uncertainty.

Many securitised credit instruments are also amortising, with principal repaid gradually over time. This can further moderate interest rate sensitivity.

In addition, the use of tranching and structural protections allows risk to be allocated across different levels of seniority. This offers investors a range of risk and return profiles within the same underlying asset pool.

Taken together, these characteristics support securitised credit’s role as a diversifying component within fixed income portfolios, particularly at a time when investors are focused on income resilience and managing interest rate uncertainty.

In addition, not all securitised products are created equal. Differences in structure, underlying assets and risk profiles can vary significantly.

Looking ahead

Interest rates were somewhat elevated throughout 2025, with modest cuts coming through in the second half. Inflation remained stubborn alongside geopolitical tensions that added to volatility. However, fixed income spreads remained at record tights.

Securitised credit spreads also tightened, but not to the same extent. The spread advantage of securitised credit over other credit remained strong into the year-end, on top of high base rates.

Securitised credit spreads are now within the median level of spreads since the global financial crisis in 2008, around 70 per cent of tightest levels. They retain an advantage over other fixed income asset classes which are close to historical tights.

In 2026, some central banks have begun to raise interest rates.

With interest rates likely to remain elevated and securitised credit spreads wider than their historic tights, the asset class may present opportunities for returns by delivering on a combination of income, diversification and spread tightening.

Hence, for investors seeking stable cash flows, differentiated sources of income and a complementary role within diversified portfolios, securitised credit stands out as a compelling opportunity among the other types of fixed income and can be a compelling component of their portfolio allocation in 2026 and beyond.

The writer is chief executive officer and head of strategic partnerships (South-east Asia), HSBC Asset Management Singapore