Senior loans

18 September 2026, 11:27 UTC Chief Investment Office GWM Investment Research

Senior loans CIO View: Senior loans Antoine Geiller, Strategist, UBS Switzerland AG Carolina Corvalan, CFA, Strategist, UBS Switzerland AG Frederick Mellors, Strategist, UBS Switzerland AG Leslie Falconio, Head of Taxable Fixed Income Strategy, CIO Americas, UBS Financial Services Inc. (UBS FS)

Central scenario US leveraged loans continued to perform strongly in August, with the Morningstar LSTA U.S. Leveraged Loan Index returning 0.93% for the month. Performance was led by the software and IT services sectors, which gained 2.24% and 2.13%, respectively. Year to date, leveraged loans have returned 3.07%, outperforming other major credit segments. However, market-value returns remain at -1.71%, reflecting weaker secondary- market prices, while the income component has contributed 4.79%. Overall, the asset class continues to benefit from a compelling income profile, with carry remaining the primary driver of returns in the current market environment.

Following the Fed’s 25-basis-point rate hike in September, we expect one further 25-basis-point increase by December 2026. However, we do not believe this signals the start of a prolonged tightening cycle akin to that of 2022. Against this backdrop, elevated base rates should continue to support attractive carry, which we expect to remain the primary driver of leveraged loan returns over the next six to 12 months.

For the overall index, PitchBook LCD reports that the US leveraged loan default rate rose slightly to 2.88% in August on a trailing 12-month, issuer-weighted basis, including distressed exchanges. Most of the default activity came from distressed exchanges. Excluding these, the issuer- weighted default rate stood at 1.17% in August. In Europe, default activity decreased, with the trailing 12-month default rate at 1.77% in July.

AI-related concerns and issuer-specific risks continue to create significant performance dispersion within the market. As a result, the market has become increasingly bifurcated, particularly between software issuers and the rest of the market, amid near-term concerns about upcoming maturities and how issuers will address them. Software accounts for around 12% of the index, and around 20% of software loans mature by 2028. In our view, default rates are likely to remain above average over the next 12 months, in the 3-4% range. This is also reflected in distress ratios, which were above average at 8.0% in August, compared with 7.2% in December 2025, based on issuer count. Distress ratios are often a leading indicator of default rates over the following year.

Loan issuance slowed to USD 15 billion in August from USD 41 billion in July. Refinancing-related activity accounted for USD 10 billion, representing roughly two-thirds of total issuance during the month. However, issuance rebounded strongly in September, reaching USD 31 billion as of 17

This report has been prepared by UBS Switzerland AG, UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 3.

September. This is not unusual, as September is typically a seasonally strong month for primary-market activity. As a result, year-to-date issuance has reached USD 301 billion, only modestly below last year’s pace.

On the demand side, collateralized loan obligation (CLO) issuance gained momentum in August, as managers priced USD 19 billion across 40 deals. Year-to-date CLO issuance totals USD 112.1 billion, 21% below last year’s pace despite the August increase. Retail loan fund flows were positive in August as investors shifted from fixed- to floating-rate products.

Yields on US and European loans remain relatively elevated at around 8.6% and 7.7%, respectively, based on three-year yields at the index level. Coupon income should remain solid in our base case and act as a buffer for total returns.

Upside scenario Goldilocks A swift resolution to the conflict in the Middle East allows oil prices to stabilize below USD 90/bbl. Disinflation resumes in the US once the tariff and energy impacts have been passed through. Investment spending and AI adoption exceed expectations. Healthy…