Benefiting from structural and technical characteristics unique to securitized products, senior CLO tranches are among the more liquid instruments in the fixed income universe. The following discussion provides an overview of the dynamics that make senior CLOs such a valuable tool for asset allocators seeking to enhance portfolio liquidity across a range of market environments, including:
- factors supporting senior CLOs’ consistent and resilient secondary market;
- how senior CLOs are often counter cyclical during broader market dislocations;
- structural protections supporting senior CLOs’ inherently low volatility and risk-remote nature;
- liquidity tests used to safeguard senior CLO cash flows across market environments.
Consistent and Resilient Secondary Market—Especially When it Matters Most
Supported by dozens of global market-making dealers, senior CLO tranches (i.e. those rated AAA and AA) consistently see robust secondary market trading volumes across varying market conditions. As such, senior
CLO bonds often serve as a critical source of liquidity, particularly during periods of market stress when senior CLO trading activity tends to increase (Exhibit 1), highlighting their liquidity.
Exhibit 1
Senior CLO trading volumes historically increase during periods of stress (Daily CLO TRACE Volume as of September 30, 2025)
During the 2020 pandemic-driven dislocation when most fixed income markets froze, U.S. AAA CLO tranches continued to actively trade, making them one of the few assets investors could readily sell with transparent market valuations. The same dynamic repeated during the regional banking crisis and again in early 2025 during the U.S. tariff-induced dislocation. European AA CLOs were similarly tested during the 2022 LDI crisis in the U.K., there too proving to be a reliable source of liquidity in a volatile market environment. In addition, over the past decade senior CLO tranches have exhibited lower price volatility—on both an absolute and relative basis—during dislocations (Exhibit 2).
Exhibit 2
Senior CLO spreads have remained stable across market dislocations and credit cycles