e e High yleld corporate bonds Preference: overweight Spread USD HY (24 Oct): 540bps (last month: 573bps) Recommendations UBS View USD HY spread target (6-month): 475bps Tactical (6 months) j ; e US high yield corporate bonds offer an ¢ We reiterate our spread target of 475bps based on still robust corporate fundamentals, a favorable attractive return outlook and should be technical backdrop and the commitment of major central banks to provide strong monetary support. In overweighted. particular, the Fed's buying of mortgage-backed securities (MBS) is likely to provide further support for the —e We prefer US over European issuers given credit universe. the increasing proportion of peripheral ¢ Thus, US high yield (HY) bonds continue to offer attractive value although spreads tightened and financial issuers in the European HY considerably in Q3. We think the recent rally has been justified in light of the favorable default outlook universe and the poorer economic outlook and central bank action. The ongoing slow recovery of the US economy, healthy company balance sheets, in Europe. robust earnings, and strong investor appetite for yield assets continue to push spreads lower. US HY thus * Inflows into HY mutual funds have been remains our preferred asset class. strong so far in 2012. New issuance was ¢ Despite the recent uptick in defaults, in the absence of a renewed US recession, we expect the default strong in Q3. rate to remain stable at 3.5% until the end of the year. A heavy load of new issuance so far this year means Strategic (1 to 2 years) that HY companies will be faced with a lower risk of failed refinancing going forward (e.g. in case of an ° We expect US defaults to remain at below- unexpected economic slump). average levels for longer. Significant re- leveraging is unlikely in the medium term. 4 Positive scenario USD HY spread target (6-month): 400bps e We believe US high yield corporate bonds ¢ Even in the positive economic scenario, spreads are unlikel