Investment grade

20 August 2026, 20:41 UTC Chief Investment Office GWM Investment Research

Investment grade CIO View: Investment grade Antoine Geiller, Strategist, UBS Switzerland AG Frederick Mellors, Strategist, UBS Switzerland AG Carolina Corvalan, CFA, Strategist, UBS Switzerland AG

• We hold an Attractive view on investment grade bonds. We find the Global Asset Class Preference Attractive outright level of yields appealing (5.1% in USD and 3.7% in EUR) and believe investors with excess cash holdings should look to add short- Bloomberg US Int. / Bloomberg Euro Agg. to medium-duration investment grade bonds for appealing income Corporate spread prospects. 17 Aug 26 71.0 77.0 Dec 26 70.0 80.0 • Investor demand for high-quality credit should remain strong in light of elevated yield levels and solid investment grade corporate Jun 27 70.0 80.0 fundamentals. Source: Bloomberg Barclays, UBS

Central scenario Investment grade bond yields remain elevated at 5.1% in US IG (1-10y) and 3.7% in EUR IG, up some 50-70bps since the start of the year. The move higher in yields this year has mostly been driven by the shift higher in policy rate expectations following the start of the US-Iran war. Meanwhile, credit spreads have remained in a relatively tight range amid resilient growth, solid fundamentals and strong investor demand.

Implied 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, as markets reprice lower the extent of future policy rate tightening.

On the demand side, we have seen investor appetite for high-quality bonds remaining generally robust this year in the context of appealing yields, resilient growth, solid earnings, and contained rate volatility, as evidenced by continued solid fund inflows. Strong demand has helped to absorb elevated bond supply. According to data from BofA, as of the end of July, IG issuance of USD 1.35 trillion is up 34% year over year. A large portion of the increased supply was from the US hyperscalers to fund AI-related capex, a trend that is likely to continue in the year ahead given ongoing elevated capex needs.

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

Our view has been that a sustained elevated pace of bond supply from hyperscalers could lead to some supply indigestion and moderately wider spreads, which we saw in the month of July as the US IG index spread widened by 4bps (hyperscaler bonds currently represent about 4% of the US IG Intermediate index). However, from a fundamental perspective, we note that most of the hyperscalers are AA rated or higher with considerable debt capacity under their current ratings (i.e., an ability to increase debt levels without compromising their current credit ratings). The exception is Oracle, which was downgraded to BBB- by S&P on rising capex requirements and customer concentration risk, however the rating agency also raised the outlook to stable and sees the company committed to retaining its investment grade rating. Over the medium term, we expect current elevated capex levels to boost operating free cash flow in the coming years as investments in AI infrastructure are monetized over time, particularly as AI adoption increases. The recent earnings season provided some encouraging signs in this direction, as cloud revenues and backlogs grew strongly among several of the hyperscalers.

In aggregate, fundamentals remain solid. Based on preliminary 2Q26 earnings (according to data from BofA), median y/y EBITDA growth accelerated to…