Investment grade corporate bonds Preference: overweight Current global spread (24 Oct): 150bps (last month: 173bps) Recommendations UBS View Spread target (6-month): 140bps Tactical (6 months) ¢ Given the recent rally in investment grade (IG) bonds, spreads have approached fair levels, in our view e We keep an overweight in IG corporate and are likely to trade more or less sideways in the coming 6 months. Still, IG bonds will likely continue to over government bonds. outperform government bonds, offering low volatility and stable income. e In Europe, internationally diversified ¢ We lower our spread target from 170bps to 140bps due to the improved global macro and risk companies from non-financial sectors environment after recent central bank action and the pickup in economic data. IG bonds remain offer a low but stable income stream for supported by our outlook for sluggish but positive global growth, ongoing investor appetite for income- conservative investors. generating assets, and expected negative net issuance. ° Financials in the US are in a better position ¢ Non-financial corporates: While total yields are at record lows, the pickup over government bonds and than their European peers money market rates is still attractive. Aggressive re-leveraging by companies looks unlikely. * We recommend bonds fr m the | FIG ¢ Financial corporates: Due to regulatory challenges, spreads are expected to remain above past averages. € recomme onds Tro € towe US banks are in a more favorable position than their European peers as they are better capitalized and rating segments (BBB and A) over higher- earnings have been strong recently. US financial spreads are thus likely to tighten further. rated issuers. A Positive scenario Spread target (6-month): 130bps aratepre( Tea yere . - e We prefer corporate over sovereign assets ¢ Global growth accelerates more forcefully than expected. This could compress spreads closer to pre-crisis ‘ ; ; . ; . ; . given how much more robust c