A slice of senior loans in the portfolio pie

Bottom line up top:

Inflation pipes: steady pressure, but cooler to the touch. A flood of geopolitical headline risks has been roiling markets, all but drowning out data showing a U.S. economy that may be leaking strength at the margins but remains far from underwater. Inflation prints have been mixed to marginally improved. Last week's delayed release of November's core Personal Consumption Expenditures (PCE) Price Index - the Federal Reserve's preferred inflation barometer - came in at 0.2% for the month, largely in line with consensus forecasts, while the year-over-year rate of 2.8% was slightly below expectations but still higher than the Fed's 2% target. The lack of meaningful improvement in the year-over-year data highlights why policymakers are likely to remain cautious.

Although tariffs have yet to spark the rapid reacceleration in U.S. inflation that many observers had predicted, “affordability” is a hot topic of debate. That’s because consumer spending, historically the engine of broader economic growth, will most likely need to continue at healthy levels to instill confidence in the economy and soothe markets. Retail sales, an important indicator of consumer spending, have surprised to the upside, although the most current release is November’s delayed reading. Retail sales control group data — which excludes some volatile categories and feeds directly into GDP growth — reinforces the message that positive real consumption growth was intact heading into 2026 (Figure 1). Notably, strength is concentrated in services-oriented and nondiscretionary categories, while big-ticket discretionary spending shows early signs of fatigue. In short, consumers are still spending, but selectively. On balance, inflation and consumption data argue for policy patience rather than policy urgency.

Markets are pricing the policy pivot — carefully. Fixed income markets are paying attention to the patience theme, as the fed funds futures market is reinforcing the message that imminent rate cuts are unlikely. For the equity market, above-consensus retail sales support near-term earnings visibility. Equity valuations increasingly rely on the assumption that inflation is cooling without severe labor-market deterioration — a forward path that looks narrow but still plausible. And within fixed income markets, a still-cautious Fed could mean that senior loans (one of our favored asset classes) have more room for upside.

Portfolio considerations

Senior loans, also known as syndicated loans or leveraged loans, returned roughly +6% in 2025 - their third consecutive year of strong performance and ninth positive year of the past ten, as measured by the S&P UBS Leveraged Loan Index. The loan asset class continues to provide high levels of income, even with two Fed rate cuts priced in for 2026. As of 22 January, the senior loan market was yielding 7.97%.

Beyond compelling yields, we see three additional reasons why senior loans are currently attractive:

• A healthy macroeconomic backdrop supports the asset class. U.S. real GDP growth is elevated, with last week's updated report for Q3 2025 at +4.4%, and the Atlanta Fed's current tracking estimate for Q4 at +5.4%. The labor market, while softening, is still in solid shape, and consumers remain resilient, with comparatively healthy balance sheets. These factors support loan issuer revenues and cash flows.

• Recent refinancing activity has reduced near-term risk for stronger issuers. Increased refinancing and repricing activity over the past two years has allowed many larger, higher-quality issuers to extend maturities and proactively address balance sheet risk.

• Discounted prices and ample liquidity are bolstering total return potential. Roughly $200 billion of loans are trading below par in the $75 - $95 range (Figure 2), offering upside opportunity that equates to high total return potential when paired with the level of income provided. Additionally, periods of macro-driven volatility, which inevitably occur from time to time, can pressure prices indiscriminately, creating opportunities for actively managed portfolios that focus on larger, more liquid issuers. In fact, because fundamentals for loan issuers are uneven - with stress concentrated in the lowest-quality segment while higher-quality issuers exhibit better access to capital and financial flexibility - active management and issuer selection within the asset class are more important than broad exposure.

Overall, senior loans can be a worthy addition to portfolios based on both the currently favorable asset class environment and their historically demonstrated ability to offer high levels of income, strong total return potential and diversification advantages.

Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

• macro and asset class views that gain consensus among our investors
• insights from thematic "deep dive" discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
• guidance on how to turn our insights into action via regular commentary and communications