The capital markets have already priced in a Federal Funds rate cut for Wednesday's meeting, stemming from sluggish labor market data, and inflation dynamics could have positive opportunities for the CLO market, according to Deutsche Bank.
For November 2025, the Federal Reserve Bank of Chicago found that real-time unemployment was 4.44%, up from the Bureau and Labor Statistics' 4.44% rate a year before.
Although that readout was shaky, payrolls in the U.S. added 4,750 jobs per week in the four weeks leading up to November 22, according to data from ADP, suggesting recovery from U.S. private payrolls losing 13,500 jobs per week through November 8.
Aside from employment numbers that are still fluctuating, year-over-year inflation rates could remain persistent, sending Fed base rates north of 3%, which is the committee's target for long-run neutral territory for 2026, Deutsche said.
That direction could present the CLO market with positive credit opportunities, the bank said.
Yearend prospects
As the year winds down, moderately range-bound price levels on BB-rated collateralized loan obligation (CLO) assets could present buying opportunities to investors, according to a recent CLO weekly market look from Deutsche Bank.
The buying opportunity springs from CLO secondary rate spreads in the week leading up to December 5. Overall, rates either held firm on certain levels of the credit stack or were marginally tighter in the first few days of December—after softening throughout October into much of November.
Triple-B CLO spread levels, however, softened again by about six basis points, according to Deutsche Bank.
It appears that on a year-to-date basis dispersion on prices and spreads on CLO BB grew, with the segment losing almost 2.5% price and widening by 42 basis points.
Also, BB bonds have experienced the same dynamic in the primary market, according to Deutsche Bank analysts. The BB-rated bond spreads compressed by 16 bps, from the trailing two-week average, yet they remained wider than any other segment of the credit stack, presenting the market with the buying opportunity, according to Deutsche.
That window could be fleeting, however, if economic data releases are more positive at the start of the year, according to analysts.
For now, BB bonds in CLO stacks are yielding 10.3% in the secondary market, roughly 4% higher than what the BBB bonds are currently paying, Deutsche analysts said. They are also more attractive from a risk-reward perspective, paying only 2% below the median equity payout in Q4 last month, analysts said.
