UBS Sees Risk of Credit Spread Widening as Fed Cuts, Yields Fall

Spreads on US investment-grade and high-yield corporate bonds will probably widen as labor markets weaken, the Federal Reserve cuts rates, and yields decline, according to a UBS Group AG US Credit Outlook report for the third quarter.

• Spreads narrowed materially last week, but there’s very little risk for trade tariffs priced in. Further tightening would require a combination of falling tariff rates, accelerating growth, rising oil prices and low supply
• High-grade credit derivatives are cheap relative to investment-grade corporate bonds. High-grade bonds should underperform derivatives when spreads widen moderately, according to the report by strategists including Matthew Mish
  • Leveraged loan ...