CLOs in a Rate-Cutting World

My PYE Framework in Action

Why this matters

The headline view is simple: “rate cuts kill CLO cash flows.” That’s incomplete. In reality, both assets and liabilities reprice, credit spreads adjust, refinancing activity changes, and discounts move. For me and my Predictable Yield Engine (PYE), the goal stays the same: hold an 8% income floor and compound toward 14% total return. Rate cuts don’t end that mission. They just change which parts of the portfolio are doing the work.

How rate cuts really flow through

• Loan coupons reset lower – negative for equity tranches.

• CLO liabilities reset lower too – funding costs often fall faster than assumed.

• Credit spreads often tighten – healthier borrowers mean fewer defaults, which supports NAVs.

• Refinancings pick up – adds prepayment income.

• Discounts widen in fear – that’s when I add.

This balance is not automatic. If cuts arrive alongside a slowdown, defaults rise and CLO equity can get hit before recovery. Moody's Analytics has updated its projections for leveraged loan defaults. Moody’s projects the leveraged loan default rate will hold near 7.5% through late 2025 and edge higher toward 7.9% in early 2026, already more than twice the long-term average of ~3.4%.

My current CLO holdings (as of late August 2025)

ECC (Eagle Point Credit)

• Price: $7.24 (Aug 27)

• NAV: $7.31 (Q2 end, June 30)

• Valuation: ~–1.5% discount

• Distribution yield: ~23.2% forward (based on $0.14/month payout)

• Why I hold it: recurring cash distributions of ~$0.69/share last quarter covered the $0.42 quarterly dividend (3 × $0.14). That coverage gives confidence in payout durability.

EIC (Eagle Point Income)

• Price: $13.73 (Aug 27)

• NAV: $14.39 (July 31)

• Valuation: ~–3.7% discount

• Distribution yield: ~10.9% forward

• Why I hold it: hybrid structure with CLO debt for stability and equity sleeves for upside. Rare to see this fund trade below NAV. It’s a tactical add when discounts open and coverage holds.

CLOZ (Eldridge BBB-B CLO ETF)

• Price/NAV: ~$26.80 (Aug 27), trades essentially flat

• 30-day SEC yield: ~7.6%

• Why I hold it: exposure to BBB/BB CLO tranches in an ETF wrapper. Lower yield than equity funds but more stability. It cushions the higher-yield holdings.

JBBB (Janus Henderson B-BBB CLO ETF)

• Price: $48.40 (Aug 28)

• NAV: $48.42

• Valuation: flat

• 30-day SEC yield: ~7.1%

• Why I hold it: BB/BBB CLO tranches. Higher yield than CLOZ, slightly more volatility. Complements CLOZ while keeping costs low.

Structural risks I monitor

ECC and EIC both hold combo notes and asset offset tranches. Regulators label these “Atypical.” NAIC stress tests show they are more loss-sensitive in stress scenarios than standard tranches with the same rating. That’s why I read the footnotes and keep sizing tight.

Manager skill matters

Academic research finds CLO equity can deliver “statistically and economically significant abnormal returns.” But in aggregate, CLO managers do not consistently outperform other leveraged loan participants. Holding ECC is not just an asset class exposure — it is a bet on Eagle Point’s ability to navigate resets and reinvestment. In my PYE framework, that is a high-conviction manager call.

My PYE rules in practice

• Only add when discounts exceed 10% or Z-scores drop below –1.0. A Z-score that low means today’s discount is more than one standard deviation wider than its 1-year average.

• Coverage must hold. If recurring cash < distributions for two quarters, I trim.

• Sizing discipline. No single CLO >3% of portfolio, total allocation capped near 7%.

• ETFs behave differently. They stay near NAV, so I treat them as steady exposures to rated tranches and size them around spread dynamics.

Where this leaves me

ECC and EIC provide double-digit income with coverage. CLOZ and JBBB add lower-volatility exposure at far lower cost. Reinvestment into these funds at discounts is what powers my compounding math. Rate cuts don’t kill this playbook. They just change which positions carry the income load and which provide NAV recovery torque.

My PYE framework remains the same: lock the 8% income floor, and capture 12–14% total return over time through coverage, valuation discipline, and reinvestment.

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Disclaimer
The analysis and commentary shared here reflect my own research and investment approach. This content is provided for informational and educational purposes only and should not be considered financial advice, a recommendation to buy or sell any security, or an endorsement of any particular strategy. Nothing here is tailored to the investment needs or circumstances of any individual. Charts, graphs, or figures are illustrative only and should not be relied upon as the basis for investment decisions. Please consult a qualified financial advisor before making investment choices that may affect your personal financial situation.