Navigating the Shifting Tides: UBS Asset Management's Cautious Approach to Corporate Bonds

In a market landscape marked by volatility and uncertainty, UBS Asset Management has been taking a strategic approach to its global portfolios, actively selling corporate bonds during market rallies. This move, driven by concerns over a potential economic slowdown and the looming U.S. election, reflects a cautious stance aimed at preserving returns and mitigating risks.

Weathering the Storm: UBS Asset Management's Defensive Positioning

Cautious Outlook on Corporate Bonds

UBS Asset Management's head of fixed income UK, Jonathan Gregory, has expressed concerns about the current state of the corporate bond market. Despite the recent rally, which has driven yields on corporate bonds down relative to government debt, Gregory believes that investors are not being adequately compensated for the inherent risks associated with this historically volatile asset class. With credit spreads – the extra returns investors receive on company debt – hovering around their lowest levels since early 2022, Gregory sees the market as being "priced pretty close for perfection."

Potential Headwinds on the Horizon

Gregory's caution stems from his assessment of the economic landscape and the potential impact of external factors. While a recession is not his base case scenario, he acknowledges the growing risks around a U.S. recession, which could lead to credit spreads underperforming. Additionally, the uncertainty surrounding the upcoming U.S. election has further fueled his concerns, prompting UBS Asset Management to take a more defensive stance.

Tactical Adjustments in Global Portfolios

In response to these market conditions, UBS Asset Management has been actively selling corporate bonds across its global portfolios during periods of market strength. Gregory, who oversees around $30 billion in global funds at the $1.7 trillion asset manager, has stated that this strategy applies to both U.S. and European investment-grade and high-yield debt.

Seeking Safer Havens

As part of its defensive positioning, UBS Asset Management has shifted its focus towards shorter-dated government bonds, which Gregory believes can provide a reliable source of income and potential safety in the event of market turbulence. This move reflects the asset manager's preference for the relative stability and lower risk profile of government debt compared to the more volatile corporate bond market.

Cautious Optimism Amid Uncertainty

While UBS Asset Management is not entirely abandoning corporate bonds, the asset manager's cautious approach underscores the need for investors to carefully navigate the current market landscape. As Gregory aptly states, "We're not saying you shouldn't own any credit, it's just that we should be wary." This measured stance highlights the importance of adaptability and risk management in the face of evolving market conditions and potential economic challenges.