Investors Turn to Securitized Credit for Diversification

Despite some lingering uncertainties, institutional investors are embracing securitized credit for its valuable diversification from traditional fixed income, according to WTW.

Strategists noted that while securitized credit encompasses a wide range of pooled assets backed by consumer, commercial, and corporate debt, consumer-linked debt, in particular, often delivers higher yields than similarly rated corporate debt.

They added that although some areas of consumer-linked debt face pressure, with credit performance varying by loan type and income group, certain segments of the market remain attractive.

For example, mortgage and Home Equity Line of Credit (HELOC) delinquency rates have remained consistently low. However, credit card, auto, and unsecured personal loan delinquencies have risen, particularly among subprime borrowers.

This trend reflects the heavier debt burden these consumers face compared to their prime counterparts, as higher interest rates and depleted savings strain their ability to repay — underscoring the varying credit performance within consumer-linked debt.

Within the more liquid securitized market, investors are finding value higher up the capital structure in consumer ABS due to its attractive income and shorter duration profile, according to WTW.

Strategists noted that as delinquency rates may rise further, consumer ABS originators could tighten credit underwriting, potentially enhancing the quality of underlying collateral. However, the extent of tightening and collateral quality varies significantly by originator.

In private credit, strategists added that they see opportunities in asset-backed lending for investors with strong sourcing and structuring expertise.