UBS Upgrades High-Yield Bonds to 'Attractive,' Citing Favorable Return Outlook

UBS has upgraded its view on high-yield bonds to "attractive," citing an improved outlook for total returns driven by the recent rise in global bond yields. The investment bank said in a note Friday that it projects the asset class is positioned to deliver returns in the high-single-digit range over the next 12 months.

Yields Rise, Creating Opportunity

The upgrade is primarily based on the more favorable return prospects following a run-up in bond yields, according to UBS. The bank attributed the higher yields to a market-wide repricing of central bank policy expectations, which has been fueled by rising energy prices and concerns about potential second-round inflationary effects.

Despite the upward pressure on yields, UBS noted that total returns for high-yield bonds have remained positive year-to-date. This resilience was credited to the segment's elevated carry—the income generated from bond coupons—and its relatively low duration profile, which makes it less sensitive to interest rate fluctuations.

Stable Spreads Underpin Outlook

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UBS highlighted that credit spreads have been "largely range-bound" even amid the recent energy price shock. The bank expects this stability to persist, supported by several key factors:

• Ongoing stable economic activity
• Solid corporate balance sheet fundamentals
• Low default risks
• Consistent yield-based investor demand

Looking ahead, UBS's base case forecasts that total returns will be driven primarily by carry and duration. While the bank anticipates that high-yield spreads may widen modestly, it believes the combination of high starting yields and low default risk presents a compelling case for the asset class.