e e High yleld Corp orate bonds Preference: overweight Spread USD HY (26 June): 660bps (last month: 660bps) Recommendations UBS View USD HY spread target (6-month): 525bps Tactical (6 months) © US high yield (HY) bonds continue to offer attractive value; we expect high single-digit total returns over ° US high yield corporate bonds offer an the next six months. We stick to our spread forecast of 525bps based on an ongoing recovery of the US attractive return outlook and should be economy, robust company balance sheets, rising earnings, and ongoing investor appetite for higher- overweighted. yielding assets. US HY bonds remain our preferred asset class. ° We prefer US over European issuers given ¢ Fundamental factors remain supportive. Despite the recent uptick in defaults, in the absence of a the poorer economic outlook in Europe renewed US recession only a very gradual increase is to be expected. We forecast a modest rise in the and the increasing proportion of trailing default rate to 3.5% at the end of the year from 3.1% in May. A heavy load of new issuance in the peripheral and financial issuers in the first three months of the year means that HY companies will be faced with a lower risk of failed European HY universe. refinancing going forward (e.g. in case of an unexpected economic slump). ° Inflows into HY mutual funds have been ¢ We acknowledge that ongoing risk aversion could still cause spreads to widen somewhat in the short run. strong so far in 2012, but new issuance has Investors who are able and willing to hold on to their HY position will likely benefit over 6 months. cooled down a bit in April and May. . ; Strategic (1 to 2 years) @ Positive scenario USD HY spread target (6-month): 450bps ° We expect US defaults to remain at below- ¢ In the positive economic scenario, a rally in high yield bonds and a return to pre-crisis spreads of about average levels for longer. Significant re- 400bps is likely. Benchmark yields would also rise, limiting HY return