High yield bonds

27 July 2026, 16:31 UTC Chief Investment Office GWM Investment Research

Adding to high yield High yield bonds Authors: Leticia Zemaitis, Fixed Income Strategist, UBS Financial Services Inc. (UBS FS); Leslie Falconio, Head of Taxable Fixed Income Strategy, CIO Americas, UBS Financial Services Inc. (UBS FS); Mustaq Rahaman, Analyst, UBS AG London Branch; Peter Din, Analyst, UBS Switzerland AG; Peter Prek, CFA, Analyst, UBS Switzerland AG; Chris Ptak, Analyst, UBS Switzerland AG; John Murtagh, Fixed Income Analyst, UBS Financial Services Inc. (UBS FS)

• Despite a volatile geopolitical and rate backdrop, US high yield has proven resilient, supported by shorter duration, higher yields, light near-term refinancing needs, and sound fundamentals.

• Although high yield has tight spreads, it offers compelling risk-adjusted returns. We view 7.3% yield as an attractive carry and expect spreads to remain contained in the near term.

• For the rest of 2026, returns are expected to be driven by carry rather than price appreciation, while likely rate cuts in 2027 are set to deliver price gains as well.

Despite a volatile geopolitical and rate backdrop, US Figure 1 - Yield per unit of duration favors the high yield (HY) has proven resilient, supported by shorter short end of the curve duration, higher starting yields, light near-term refinancing needs, and sound fundamentals. We see a constructive backdrop for the sector in the second half of 2026, as policy rates hold steady. While credit selection remains key, we are projecting a healthy return backdrop over the next year.

The US fixed income allocation has preferred securitized product over corporate credit in 2026. Increased Source: FactSet, UBS; as of 23 July 2026 supply combined with interest rate risk has led to our Neutral view. Adding short duration high yield provides Retail is the next top performer, gaining 3.0%, while the incremental yield and diversification, offering a buffer technology and cable sectors have lagged at 0.0% and against the current macro-volatility environment (Fig.1). -1.2%, respectively. By credit quality, B rated companies outperformed with a 2.2% return year to date, followed The Fed’s shift to a more hawkish stance has led to a by BBs at 1.4% and CCCs lagging at -0.6%. However, repricing at the front end of the Treasury curve, with with the positive performance witnessed in 2026, high the short-end Treasury yields bearing the brunt (Fig. yield has underperformed the equity market. While the 2). HY year-to-date performance is 1.5%, with 3.7% index composition has dramatically shifted in the S&P over coming from income offset by 2.2%, mainly from price the past five years, we continue to believe beta-adjusted depreciation owing to higher short-end rates. The HY returns in high yield will strengthen, supported by our energy sector has benefited from higher fuel prices linked 8,200 S&P projection by June 2027 (Fig. 3). to the Iran conflict, returning over 4.8% year to date.

This report has been prepared by UBS Financial Services Inc. (UBS FS), UBS AG London Branch, UBS Switzerland AG. Analyst certification and required disclosures begin on page 7. UBSFS accepts responsibility for the contents of this report. U.S. persons who receive this report and wish to effect any transactions in any security discussed in this report should do so with UBSFS and not UBS AG.

Figure 2 - Rising real yields have been a tailwind to The macro rate environment remains a primary driver to nominal yields HY performance going forward. We anticipate the Fed will hold rates steady until the first quarter of 2027, as growth slows but remains above trend. Given the current market’s expectation of two hikes over the next six months, we believe short-end yields will drift lower as the higher-for- longer Fed policy unfolds. Given this view, we believe now is an excellent time to lock in yields before rates move lower over the next 12 months. We projected total returns for the end of 2026 and through June 2027 (Fig. 5). With yields (compounding income) as the primary driver of returns, we do not believe a sentiment correction that may result in wider spreads will have a material negative impact on…