Investing in Investment-Grade ABS: A Strategic Pathway for Capital Preservation and Income in a High-Rate World

The investment-grade asset-backed securities (ABS) market has emerged as a compelling asset class for investors seeking capital preservation and steady income in an era of persistently high interest rates. From 2023 to 2025, the sector has demonstrated remarkable structural resilience, with European and U.S. markets expanding despite macroeconomic headwinds. According to an M&G report, European ABS issuance surged to €143 billion in 2024, expanding the outstanding market to €597 billion, while U.S. ABS issuance reached $298.4 billion by August 2025, reflecting a 14% year-over-year growth. This expansion underscores the sector's ability to adapt to shifting central bank policies and maintain its appeal as a defensive investment.

Structural Resilience in High-Rate Environments

The robustness of investment-grade ABS is rooted in its structural design. Unlike traditional fixed-income assets, many ABS instruments are floating rate, meaning their yields adjust with market conditions. This feature has proven critical in preserving value during periods of aggressive rate hikes. For instance, European ABS all-in yields reached percentile highs relative to equivalently rated corporate bonds in 2024, offering investors a compelling risk-adjusted return, according to SIFMA data. Additionally, the amortizing nature of ABS-where principal is repaid incrementally-reduces exposure to interest rate volatility and liquidity risks.

Default rates have remained remarkably stable, even as borrowing costs climbed. Data from an AXA IM analysis highlights that structural safeguards, such as over-collateralization and reserve funds, have shielded ABS tranches from significant losses. In the residential mortgage-backed securities (RMBS) segment, borrower resilience-bolstered by low unemployment and wage growth-has further insulated the sector from delinquencies, as noted in the M&G report. These factors collectively reinforce the argument that ABS can serve as a reliable income generator without compromising capital preservation.

Structured Funds: Bridging Strategy and Resilience

Structured funds focused on investment-grade ABS have capitalized on these dynamics to deliver consistent returns. These funds employ strategies that prioritize diversification, low-duration holdings, and rigorous credit underwriting. For example, the Great-West Short Duration Bond Fund (MXSDX) allocated at least 80% of its assets to investment-grade bonds, achieving a 5.93% one-year return as of March 2025-outperforming the S&P 500's negative returns during the same period, according to Investopedia. Similarly, the Prudential Short-Term Corporate Bond Fund (PBSMX) has delivered an average annual return of 4.43% since 1989, demonstrating the long-term viability of ABS-focused strategies (Investopedia).

European CLO (collateralized loan obligation) issuance, a subset of ABS, has also gained traction. In 2024, €49 billion in new CLOs were issued, driven by European banks' need to diversify funding sources and the sector's attractive risk-return profile, according to SIFMA. Structured credit teams, such as those at M&G, leverage ESG frameworks and granular asset analysis to construct portfolios that balance income generation with downside protection (AXA IM).

Navigating the Future: Opportunities and Challenges

Looking ahead, the ABS market is poised to maintain its momentum. Central banks' tentative rate cuts in 2024-2025 have provided relief to borrowers, while technological innovations-such as AI-driven credit risk management and blockchain-based asset tokenization-are enhancing transparency and liquidity, as highlighted by AXA IM. However, investors must remain vigilant about sector-specific risks, such as CMBS (commercial mortgage-backed securities) liquidity constraints.

For structured funds, the key to sustained success lies in active management. As highlighted by Brown Brothers Harriman, disciplined credit underwriting and pre-stressing credits to withstand severe adversity are critical to navigating uncertain markets. Additionally, the integration of ESG criteria is not only aligning with global sustainability goals but also reducing the cost of capital and broadening market access, per AXA IM.

Conclusion

In a world where traditional fixed-income assets struggle to keep pace with inflation, investment-grade ABS through structured funds offer a compelling alternative. Their structural resilience, coupled with strategic diversification and active management, positions them as a cornerstone for capital preservation and income generation. As the sector continues to evolve, investors who prioritize quality, liquidity, and innovation will be well-positioned to capitalize on its enduring strengths.