New Year’s for me is less about fireworks and more about spending time with family, taking stock of our good fortune, and reflecting on the lessons learned throughout the year. Each year, I make it a ritual to pause and consider not just personal milestones, but also the evolving dynamics of client needs, markets, and portfolio construction. Of keen focus is calibrating the risks in markets—both the obvious and the overlooked—which ultimately shape our decisions around portfolio positioning. 

That quiet start informs my current plan for 2026: stick with high-quality assets that can offer compelling yields and the resilience to handle inevitable volatility. Notably, AAA CLOs will likely serve as a core investment in portfolio construction. As market compensation for higher-risk assets remains narrow, my focus is on durable, high-quality holdings that can potentially deliver favorable outcomes in the year ahead.

Yields remain elevated, narrow spreads – growing uncertainties and dispersion

2026 will likely be characterized by more accommodative monetary policy, supportive fiscal policy, looser regulation, greater investment in infrastructure driven by AI. Other factors such as geopolitical risks, energy transition, and defense spending will play a role in the year as well.  Therefore, we are expecting greater dispersion in performance. 

Investor demand for carry remains high, while late cycle behavior along with ongoing geopolitical fragmentation are shifting the balance between risk and return. Credit spreads across many markets reflect investor demand for yield and some are seeing near generational tights in spreads.  However, we see securitized credit spreads, in particular AAA CLOs, offer strong yield profiles combined with reduced credit risk.  The risk vs reward paradigm today is a setup that forces investors to think in more differentiated terms. CLOs are well positioned to benefit from this situation, mainly due to their low duration, higher spreads and historically exceptional resilience.

Quality beats risk: the return of structural strength

For 2026, we see strong potential for AAA CLOs. In a challenging market environment, CLOs can provide access to the characteristics that investors are looking for in diversified portfolios – strong risk adjusted returns with historically lower price volatility. While traditional corporate bonds spreads remain narrow, AAA CLOs continue to offer some of the most attractive spreads in the investment-grade segment. At the same time, since inception the market has not experienced a single default in AAA or AA tranches. This exceptional robustness is no coincidence, but rather the result of a clear, multi-layered architecture: AAA bonds are secured by over 250 corporate loans across a diverse set of industries and issuers, whose cash flows first serve the highest-quality tranches in a waterfall-like system.

This structural protection setup can be a decisive factor, particularly in a year that is likely to be marked by volatility and a potential for sudden market shocks. Recent stress events – such as the volatility triggered by US tariffs – have once again demonstrated the benefit adding high quality CLOs can have on portfolios in volatile times as AAA CLOs remained resilient. Portfolios that maintain high credit quality throughout later parts of the credit cycle may exhibit lower volatility, more stable net asset values and significantly more robust risk-adjusted return profiles. This is especially true when markets abruptly shift between risk aversion and risk appetite.

A Source of Return

Another major strength of the CLO universe is its global nature. While the US market is supported by high liquidity and a broad base of institutional investors, European CLOs often offer spread advantages due to regulatory fragmentation. This geographical diversity greatly expands the scope for action: it makes it possible to take advantage of opportunities in a countercyclical manner, manage liquidity efficiently and position the portfolio in such a way that it remains stable across different credit cycles. The key here is not to follow every short-term signal, but to consistently focus on structural quality, conservative credit research and strict risk management.

AAA CLOs can therefore not only be a source of return, but also a potential anchor of stability. In a year that will likely see periods of volatility, they are poised to offer the combination of resilience and return potential that investors need – and with a structure that has been functioning reliably for decades.

Edwin Wilches, Portfoliomanager and Co-Head of the Securitized Products Team, Fixed Income at PGIM.