European ABS: No Losses for a Quarter Century and a Proven Inflation-Buster

Sébastien André
Portfolio Manager, Euro ABS

Volatility and dislocation have become ever-present in geopolitics and markets. How can investors respond?

There are many strategies and assets that can dampen volatility, reduce expected losses and mitigate against the effects of inflation in a portfolio, but credit is not often noted as one of them. In fact, the perception is that credit is vulnerable to inflationary shocks and capital loss.

But at least one type of credit instrument – European securitised asset-backed loans (ABS) – has been shown to stabilise portfolios and mitigate against inflation. Introducing ABS into the allocation can mitigate investor concerns over both the volatility of equities and the susceptibility of bonds to geopolitical shocks.

Reassessing structured finance

If the mere mention of structured finance (the broad asset class which includes ABS) gives you shivers, it’s time to reassess an asset class which has protected investors’ capital through every crisis in the last quarter of a century and has the potential to do so for forthcoming crises.

Structured finance got a bad name in the first decade of this century. Certain tranches and assets were poorly marketed and regulated, resulting in the Global Financial Crisis of 2008-2009.

But while investment grade assets and even AAA-rated assets took a sizeable hit, asset-backed securities delivered on their promise to protect investors’ capital. In fact, from 2000 until the present day, there has not been a single losing year in investment-grade European ABS and European residential mortgage-backed securities (RMBS)¹.

“European ABS are backed by a wide range of high-quality, defensive assets and in some cases thousands of loans per security,” says Sébastien André, a portfolio manager on the Mortgage and Structured Finance Team at Loomis, Sayles & Company, an affiliate of Natixis Investment Managers. “This compares with non-granular securities such as CMBS [commercial mortgage-backed securities] which might be backed by just one or two very large loans.”

And, while the perception of risk between the two types is similar, performance data tells a different story. European CMBS saw losses of 4.1% in 2006 and 2.3% in 2007. Losses in US CMBS in those same years ran into double digits¹.

ABS set for strong growth

The European ABS market is a deep and fast-growing market currently worth around $600bn³.

ABS assets are becoming highly favourable within the capital structure amid a raft of measures due to be implemented by the European Commission. These measures are projected to double the size of European ABS by 2030⁴.

So what are the inherent strengths of European ABS that have produced an asset class that has remained so stable for more than two decades?

The market is highly diversified by collateral type or jurisdiction, with the deepest markets being the UK, the Netherlands, German and France, with Spain, Italy and Portugal also dynamic. The dominant underlying assets are personal loans and auto loans, with residential mortgages a sizeable part of the mix too. The exposure to a variety of consumer segments offers diversification from corporate bonds.

The depth and variety of assets means managers are able to respond to volatile and changing market environments. “We apply broad diversification across issuers, jurisdictions, sectors and tranches,” says Sébastien.

“We revisit our investment case over time as dynamics change, at sector and country level, and even at bond level to make sure our assumptions are still valid.”

Frequently revisiting the investment case informs how Loomis Sayles moves up and down the capital structure, adding senior bonds or lower grade bonds depending on the current outlook.

The crisis in the Middle East in 2026, for example, has once again highlighted the resilience of the asset class. “We have taken advantage of the current outlook to add to senior ABS holdings,” Sébastien adds. “We believe senior tranches will hold us in good stead, since we cannot exclude additional volatility in the lower part of the capital structure.”

ABS also reduces portfolio volatility owing to its duration profile of two to five years, compared with five to ten years for corporate bonds. Short-dated bonds tend to outperform long-dated bonds at times of extreme market stress.

How to identify robust assets

While ABS has proven itself over the years, it is not an index market and the level of performance depends squarely on the skills and processes of the manager.

The 20-strong Loomis ABS team managing around $20bn of ABS assets is a collaboration of portfolio managers, strategists, research analysts and traders. It employs both top-down and bottom-up approaches, taking into consideration macro dynamics and also a deep understanding of individual sectors and bonds.

In the top-down assessment, the main dynamic is in the relative performance of subsectors. This is complemented by views on the investability or otherwise of specific jurisdictions.

Loomis Sayles combines its top-down analysis with a bottom-up assessment of each securitised product, each ABS. This entails credit analysis, an assessment of the issuer and whether its lending practices are sound and fair.

“We even examine the cashflow dynamics of each security, looking at how cash flows from the collateral to the ABS vehicles, across all the tranches,” says Sébastien.

The credit analysis is complemented by quantitative analysis, with third-party models employed to stress-test cashflows across a variety of economic scenarios, including the heightened risk levels experienced during the GFC and Covid.

The process encompasses ESG factors, with Loomis prioritising ABS with strong environmental or social credentials, such as the predominance of electric vehicle financing or first-time buyers in residential mortgage financing. Any predatory practices in underwriting and controversial assets are excluded.

Is inflation-mitigation possible?

Investors preoccupied by potential future inflation levels will be interested to know that ABS have particular benefits in mitigating inflationary environments.

“ABS are floating-rate products, so they have zero sensitivity to interest rates,” says Sébastien.

This aspect is especially useful when geopolitics make inflation-forecasting so uncertain. The expectation at the start of 2026, for instance, was that the ECB would make at least one rate cut during the year. Following the invasion of Iran, the expectation shifted to at least two hikes during the year.

“Fixed-rate products such as corporate bonds don’t respond well to this, so our portfolios have a natural edge,” says Sébastien. Although the ABS is floating rate, the underlying loans are fixed rate, so households and SMEs are not necessarily more likely to default, he adds.

So while everyone is talking about inflation risk, ABS investors are largely immune. Sébastien says: “The main risk for ABS investors is second-round effects linked to inflation on fundamental performance, but well-structured ABS have the capacity to absorb temporary shocks.”

Historical precedent favours ABS

So how resilient might European ABS be to future crises? The recent past may be instructive. In the first week of March 2020, when markets finally acknowledged the severity of Covid, senior European bonds sold off by around 5% and high yield bonds lost 10% of their value. Prices of European ABS, however, barely changed¹.

Then there was the liability-driven crisis of September 2022 during which both investment grade and high-yield bonds sold off by 15% at their worst. Again, European ABS was largely unaffected¹.

Indeed, European ABS was similarly less impacted by the Trump tariffs of April 2025.

“Can we expect the same performance in the future?” asks Sébastien. “We cannot say for certain, but the historical precedent is in our favour.”

Written in April 2026

READ MORE FROM LOOMIS SAYLES

Endnote

¹Source: Fitch Global Structured Finance Losses

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