UBS analysts are anticipating a summer conducive to strategic portfolio adjustments to optimize carry, with a specific focus on short-term European investment grade (IG) debt and strategic diversification.
In a recent note, UBS analysts highlighted the return to stability in credit spreads across Europe, especially in the high yield (HY) sector, following the recent volatility triggered by the French elections.
Strategic Recommendations for Maximizing Summer Carry
1. Prioritizing Short-term European IG: UBS emphasizes the appeal of short-term debt (3-5 years) within the European IG landscape, offering attractive yields amidst the recent yield curve inversion.
2. Re-embracing US IG Bonds: UBS suggests including US IG bonds (7-10 years) in the carry strategy for the first time in almost two years, reflecting a changing market outlook.
3. Diversification with GBP IG: The recommendation of British Pound IG bonds (5-7 years) is based on their low correlation to other assets and potential for generating favorable carry.
4. Strategic Risk Reduction: UBS advises trimming exposure to riskier assets like European HY (3-5 years) and credit default swaps (CDS) such as ITRX Main.
5. Emerging Markets (EM): While cash is favored over EM exposure in the short term, cautious re-entry into the EM market at benchmark weight is suggested for “Cash + Synthetic” investors, with synthetic-only investors having the flexibility to increase their EM allocation.
6. Maintaining Long HY Positioning: The report recommends maintaining a long HY versus IG position in the US and European markets.
UBS Model Recommendation
Cash + Synthetic Investors: Increase allocation to US IG (3-5 years), reduce exposure to EU HY (3-5 years) and ITRX Main, cautiously re-enter EM at benchmark weight, and maximize allocation to GBP IG (5-7 years).
Synthetic-Only Investors: Increase allocation to US IG (3-5 years) and EM exposure, maintain a long HY versus IG position in both regions, and reduce exposure to ITRX Main