High yield

20 August 2026, 21:40 UTC Chief Investment Office GWM Investment Research

High yield CIO View: High yield Frederick Mellors, Strategist, UBS Switzerland AG Antoine Geiller, Strategist, UBS Switzerland AG Carolina Corvalan, CFA, Strategist, UBS Switzerland AG

• We hold an Attractive view on high yield (HY). US and EUR HY yields Global Asset Class Preference Attractive remain elevated at 7.5% and 5.9%, respectively. ICE BofA US high yield/ICE BofA Euro high • Despite the rise in geopolitical and policy uncertainty this year, credit yield spread spreads have remained in a relatively tight range. We believe this 17 Aug reflects a backdrop of resilient growth, healthy HY balance sheets Dec in aggregate, and low default prospects, in addition to supportive technicals. Jun ICE indexes, UBS • Total returns are likely to be in the high-single-digit range over the next 12 months, supported by elevated yields and low default activity. Given our view that the market is likely overestimating the path for policy rates, we see price upside from lower rates.

US and EUR HY bonds have delivered positive returns of around 2% year to date (as of 18 August). The returns were primarily supported by elevated carry, which helped to offset the impact of a significant rise in government bond yields, in the context of a relatively low interest rate duration profile (the ICE US HY and EUR HY indices have a duration of around 3.5 years). Meanwhile, credit spreads have remained range-bound within a relatively contained band, given the backdrop of resilient growth, solid fundamentals in aggregate, and yield-based demand.

We believe the current yield is likely to continue to be a solid anchor for total return prospects, with upside from lower government yields.

This is as implied central bank policy rate expectations appear overly hawkish, in our view. Currently, around 40-60bps of rate hikes are priced in over the coming year in the US and Europe. Our view is that central banks are likely to stay cautious in the near term amid above-target inflation; however, we see central bank rhetoric softening in the second half of the year as inflation is expected to trend lower. Encouragingly, we see limited signs of persistent or broadening underlying inflation pressures in the US based on the recent inflation data, and longer-term inflation expectations remain well-anchored, based on a range of estimates. Should the inflation data validate this view in the coming months, this would be a catalyst to see lower rates, particularly in the front-end, as markets reprice lower the extent of future policy rate tightening.

Default activity has remained low—at 1.9% in US HY and 1.3% in Euro at the end of June—and we expect roughly 2% over the next 12 months

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 4.

in both regions (trailing 12m par-weighted default rate). HY fundamentals remain solid overall. Balance sheets are relatively conservative with limited post-pandemic releveraging. Bank of America data show US HY leverage around 4.5x (slightly below the long-term average) and interest coverage near 4.1x (above average). Many issuers have already refinanced near-term maturities, with refinancing representing ~65% of US HY issuance last year and over 50% this year, keeping refinancing risk contained, while CCC issuance remained subdued. The distress ratio, a market-based measure of default risks, remains low in US and EUR HY markets at 4.4% and 4.3%, respectively (as of end July). Quality has improved, with BBs around 60% of the index (while CCC bonds have declined to 8%) and secured bonds are at a record of around one-third. Ratings actions have remained skewed toward upgrades in the last three months on average in the US. In EUR HY, the market remains tilted toward BBs, which comprise around 70% of the market, while CCC exposure is low at 4%.

While we expect overall defaults at the index level to remain low, we anticipate rising spread dispersion within the lower-rated segments. We believe this justifies an active and selective approach. In terms of the upcoming bond maturities, around USD 211bn or 14% of…