Cloud 9fin Tranche Talk — Looking ahead to 2026 with BofA's Pratik Gupta
Dec 19, 2025
Pratik Gupta, CLO and RMBS researcher at Bank of America, shares his insights on the financial landscape as 2025 approaches. He argues that CLOs are poised to thrive in a rate-cutting environment and explores the dynamic demand from US and Japanese banks. Pratik addresses concerns surrounding private credit CLOs, revealing that many perform well despite media fears. He emphasizes the importance of cautious portfolio construction and highlights promising trading strategies for CLO managers aiming for differentiation in a competitive market.
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Banks Remain Core CLO AAA Buyers
- US and Japanese banks remain the core AAA buyer base because they prefer floating-rate assets.
- Rising JGB yields don't materially reduce Japanese demand since CLOs still offer hedged floating-rate relative value.
Plan For Flatter ETF Demand
- Expect modest ETF inflows in 2026 and plan for spreads to widen with higher net supply.
- Don’t rely on retail-driven ETF demand to absorb increased CLO issuance next year.
Why CLO Equity Struggled In 2025
- CLO equity suffered from compressed portfolio margins and elevated defaults, producing negative returns in 2025.
- Pratik Gupta expects improvement in 2026 as loan supply recovers and margins stop compressing.