The demand for esoteric asset-backed securities (ABS) – which bundle less traditional assets like music royalties, timeshare loans, and leases for aircraft and data center space – surged in 2024. This appetite, which is expected to remain high in 2025, was largely driven by insurers and other institutional investors looking for yield, diversification, and duration that match their portfolios amid growing uncertainty across financial markets.
In 2024, interest from buyers far exceeded the available supply, which was already at records. Fortunately, supply conditions in the year ahead appear promising as a tighter spread environment and high demand for esoteric ABS are favorable for both programmatic and first-time issuers.
Insurers, in particular, have been drawn to the asset class due to its relative value and diversification versus other, more traditional options like investment-grade corporate bonds.
Record ABS Issuance in 2024
Last year, total ABS supply reached a post-Great Financial Crisis (GFC) record, with $338 billion in new issuance, according to Bloomberg. Notably, esoteric ABS, a previously niche subsector that has been steadily growing, made up more than 30% of the total.
Additionally, because of record issuance and a higher interest rate environment post-COVID-19, fewer deals are being called, which has further increased the market's size. This growth pushed the size of the outstanding total ABS market to nearly $900 billion, with esoteric ABS now encompassing approximately 40% of the asset class.
This growing supply should help alleviate the bottleneck seen in 2023 and early 2024, when investors faced a scarcity of attractive deals.
A Market Overwhelmed by Demand
Despite record supply, oversubscription levels in 2024 highlighted the intense demand for esoteric ABS. A survey of brokers active in primary esoteric ABS issuance conducted by Conning found that deal oversubscription levels remained elevated throughout the year, averaging just below five times across the capital stack, while some new issues were oversubscribed by more than 10 times in peak months.
Investor interest was particularly pronounced in BBB- and BB-rated tranches, which saw average subscription rates of 6.4 times and 6.6 times, respectively, largely driven by their generally wider spreads and smaller class sizes.
Strong Inflows Into Short-Duration Strategies
Consistent fund flows into short-duration fixed-income strategies provided another demand tailwind for ABS, which generally resides in the front end of the risk spectrum. An analysis of 25 large retail ETFs focused on the ultra-short, one- to three-year space revealed that investors poured more than $15 billion into these short duration funds in 2024, with net outflows occurring in only nine weeks of the year.
While this sample captures primarily retail activity, we can deduce that institutional flows into similar strategies were likely multiples of these figures, reinforcing the strong technical backdrop for esoteric ABS.
A Strategic Fit for Long-Term Investors
As insurers seek alternatives to traditional fixed income, esoteric ABS is emerging as a valuable tool for portfolio construction. Beyond offering yield enhancement, these securities can be structured to align with insurers' liability profiles, providing predictable cash flows over extended periods.
For example, esoteric ABS can deliver steady and predictable long-term income streams that closely match the long duration liabilities of annuity payments or pension obligations. Music royalty-backed ABS deals are one approach insurers may be able to pursue for potentially steady cash flows.
Opportunities to Enhance Yield, Diversification
Esoteric ABS also offer a compelling diversification advantage. Traditional fixed-income sectors are highly correlated with economic cycles, and current market conditions that are shaped by monetary policy, fiscal uncertainty, and legislative shifts have recently heightened volatility.
By incorporating esoteric ABS into their portfolios, insurers and other long-term investors can gain exposure to assets with lower correlation to traditional market risks. Sectors such as aircraft leases and fiber optic network contracts, for example, generate cash flows that are largely independent of broader, traditional market cycles.
A Strong 2025 Outlook
As we move into 2025, the demand for esoteric ABS is expected to remain robust. With spreads on investment-grade corporate bonds near historically tight levels, institutional investors are increasingly turning to securitized credit—and esoteric ABS, in particular—as an attractive alternative to the well-trodden path of traditional fixed income instruments.
With its ability to provide higher yields and relatively stable cash flows, the asset class will continue to be an attractive option to diversify portfolios while maintaining effective asset-liability matching. It will continue to grow and establish its role as a vital part of institutional investment strategies in 2025 and beyond.
