Article/Intelligence
CLO ETFs Face First Big Test as Fed Cuts Interest Rates
Reporting: Hugh Minch CLO exchange traded funds, or ETFs, have been one of the most notable success stories within leveraged finance of 2024. Assets held within these funds recently surpassed $15 billion after posting strong inflows throughout the year, and new entrants to the space continue to emerge. The latest of these is Palmer Square Capital Management, which announced the launch of two credit ETFs, including the Palmer Square CLO Senior Debt ETF (PSQA) on Sep. 11. These funds are currently facing their first major test as to whether investor appetite will persist even as the interest rate environment changes. After the Federal Reserve cut interest rates by 50 bps on Wednesday, Sep. 18, the first such cut in over four years, some in the market are concerned that retail capital may be poised to rotate into fixed-rate products and away from floating-rate CLO funds. Others are concerned that the growth of CLO ETFs could lead to an increase in volatility in the CLO tranche market. Although banks have accounted for much of the growth in demand for CLO triple-A paper seen in 2024, with various new banks entering the market and others maintaining their books amid increased paydowns,[...]