Turning to 2026, the path ahead for interest rates is one of the key determinants of the 2026 CLO market. The US saw the 25bps interest rate reduction from the Federal Open Market Committee (FOMC) on 10 December 2025,1 bringing the benchmark to 3.5%–3.75% for the first time since October 2022. However, as Flannick points out, “With a new Federal Reserve Chair set to be appointed, as well as the dual challenges of a stagnant and likely softening labour market combined with an elevated inflation rate near 3%, where rates go from here is far from certain.”
If a further 25bps rate cut at the June 2026 FOMC meeting happens once the Committee has a new Chair, this would deliver a “pro-growth” set up for the US CLO market, notes Flannick.
Overall, his team anticipates new issue volumes in 2026 to slightly contract to US$190bn. Although strong market fundamentals should persist over the next 12 months – such as relatively high all-in base rates, continued annuity and exchange-traded fund inflows, and constructive corporate balance sheets – the CLO market will contend with broader late-cycle macro conditions expressed in sluggish economic growth, which will present a headwind.
And while a number of factors could lead to another record-breaking year for CLO new issuance – such as an acceleration of leverage buyout and mergers and acquisition activity following the Fed rate cuts, and a further reduction of trade and fiscal policy uncertainty – downside risks also exist which could dampen deal activity, such as a slowing labour market or an increase in headline leveraged loan defaults.
Turning to Europe, the team is forecasting €65bn in gross new issue CLO supply (an 8% uplift on 2025) with net issuance at €45bn. As for resets, the team estimates around €53bn in potential reset/refinancings if current spread levels are maintained. They note that “reset economics are more sensitive than [at] any point in the last few years”.
The European market has grown 16% to €294bn since the end of 2024, and the team expects the market size to reach €300bn by the end of 2026 (see Figure 3).
Figure 3: CLO market size evolution
Source: Deutsche Bank
Overall, they warn that “proactive CLO management will be crucial for buffering against potential credit downgrades and defaults, especially as manager and deal performance tiering, already stark, is set to sharpen further”.
As with the US, downside risks include the threat of policy uncertainty. “Should trade tensions flare up once again, potentially leading to widespread increases in tariffs, the ripple effects would be considerable. This would further strain already affected sectors, increasing input costs for businesses and ultimately lead to higher prices for consumers, dampening overall economic activity and demand.”
The other risk is an increase in headline leverage loan defaults. “A material uptick in defaults or renewed credit fears, particularly among larger borrowers or across multiple sectors, would undoubtedly cause greater concern regarding the overall credit health of the leveraged finance market,” says O’Toole.
The macro context will be highly influential for both markets. However, given these growth forecasts and the strong underlying fundamentals where both markets are starting from, the CLO market in 2026 should once again be vibrant in terms of deal activity and offer investors a variety of opportunities to gain exposure to the growing US$1.5tn asset class.
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