U.S. Credit Outlook: 10 key themes to position for Q3

Investing.com -- UBS expects U.S. corporate credit spreads to widen in the second half of the year, cautioning that markets are underpricing the risks from slowing labor markets, potential trade tariffs, and upcoming Federal Reserve rate cuts.

The brokerage laid out 10 themes for positioning in the third quarter, arguing that the sharp tightening in spreads seen in early July likely reflects seasonal trends, performance-chasing by credit managers, and renewed inflows into fixed income, factors that may not be sustainable.

"Investment-grade and high-yield spreads are at or near historic tights," UBS wrote, pointing to levels of 77 basis points and 268 basis points, respectively. "A further rally would require a combination of falling tariff rates, accelerating growth, higher oil prices and constrained supply."

The bank’s base case calls for spreads to drift wider into late Q3 as U.S. payroll data weakens and rate cuts begin in September. UBS expects the unemployment rate to rise to 4.6% by year-end and forecasts four Fed cuts in 2025—more than the market currently anticipates.

UBS said corporate bond markets appear complacent on tariff risk ahead of a July 9 deadline for new U.S. trade measures. High-yield sectors that had lagged earlier this year, such as transport and packaging, have largely rebounded, further suggesting “very little risk is priced in.”

While technicals remain supportive, credit fund flows have recovered, and June issuance was largely in line with forecasts, UBS highlighted three key positioning ideas. It favors investment-grade credit default swaps over cash bonds, sees better value in double-B and fallen-angel high yield, and expects leveraged loans to outperform high-yield bonds in the coming months.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

Even with no major cracks in private credit or corporate defaults, UBS noted that valuations are stretched. “The upside scenario is possible, but fragile,” it wrote, hinging on a confluence of positive surprises in policy, growth, and commodity prices.

Should you invest $2,000 in UBSG right now?

ProPicks AI are 6 model portfolios created by Investing.com which identify the best stocks for investors to buy now. The stocks that made the cut could produce monster returns in the coming years. Is UBSG one of them?

Unlock ProPicks AI to find out