example.js

const compiler = require('vue-template-compiler');
const template = '<p>a&nbsp;b</p>';
console.log('----','template');
console.log(template);
for (let opt of ['preserve','condense',undefined]) {
	let x = compiler.compile(template, {whitespace: opt});
	console.log('\n----','whitespace:',opt);
	console.log(x.render);
	console.log(x.render.indexOf('\xA0') >=0 ? 'NBSP FOUND': 'NBSP NOT FOUND');
}

vue-example-output

---- template
<p>a&nbsp;b</p>

---- whitespace: preserve
with(this){return _c('p',[_v("a b")])}
NBSP FOUND

---- whitespace: condense
with(this){return _c('p',[_v("a b")])}
NBSP NOT FOUND

---- whitespace: undefined
with(this){return _c('p',[_v("a b")])}
NBSP FOUND