Stress in one of the credit market's riskiest areas is intensifying: Collateralized loan obligation (CLO) equity tranches returned -15% in Q1 2026, their worst quarterly performance since the 2020 pandemic crash. These tranches represent the highest-risk layer of the $1.3 trillion CLO market, with equity investors taking the first losses when underlying loans underperform. This also marks the 2nd consecutive quarterly loss and even exceeds the Q2 2022 bear market drop of -12%. The selloff has been driven by a decline in software loan prices combined with fewer new corporate loans being issued. This leaves CLO managers, the firms responsible for selecting the loans inside CLO portfolios, with fewer opportunities to invest in attractive assets, putting further pressure on returns. Credit market stress is rising beneath the surface.(The Kobeissi Letter)