UBS maintains attractive view on high grade, investment grade bonds

Investing.com -- UBS is maintaining its "Attractive" asset class recommendations on high grade and investment grade bonds while keeping a "Neutral" stance on high yield and emerging market credit.

Over the past month, rates between the US and the rest of the world have decoupled, with US rates slightly lower while those in Europe and other advanced economies moved slightly higher, according to Frederick Mellors, Strategist at UBS Switzerland AG.

Credit spreads continued to tighten amid broader risk-on sentiment, resulting in healthy monthly returns. On a one-year basis, all fixed income segments are outperforming cash.

A key development was the expiration of the April "Liberation Day" 90-day delay, after which the Trump administration began distributing letters to trading partners outlining tariff rates.

Japan, the EU, and South Korea accepted 15% tariff rates, while Vietnam received 20%, and Indonesia and Philippines 19%. India and Brazil faced higher tariffs of 25% and 50% respectively.

Many details about sector-specific tariffs and enforcement mechanisms remain unknown, as do timeframes for investment pledges into the US. Several key trading partners, including Mexico and Canada, continue negotiations.

US economic data showed ongoing moderation in growth, though consumer spending remains resilient. The July CPI showed minimal evidence that US consumers are bearing the cost of tariffs on imported goods.

The Federal Reserve’s mandate has become increasingly politicized. While the Fed consensus signals that ongoing rate cuts are warranted, opinions among committee members are diverging. The recent soft July payroll data, which included significant downward revisions, strengthened arguments for near-term cuts.

President Trump’s dismissal of the Bureau of Labor Statistics head has complicated data analysis. Governor Kugler’s resignation gave Trump an opportunity to reshape the Fed by temporarily appointing Steven Miran to a voting seat.

Outside the US, the European Central Bank held rates at 2%, with President Lagarde outlining various possible scenarios for future policy direction. Germany disclosed draft budget details signaling more front-loaded stimulus, while the UK reversed welfare spending cuts, adding to supply concerns across Europe.

In Japan, snap upper house elections on July 20 saw the ruling LDP-Komeito coalition lose its majority, putting pressure on Japanese government bond yields.

UBS sees value in long-duration positioning relative to strategic benchmarks in the US, UK, and Germany, particularly in the middle of the yield curves.

The bank maintains an up-in-quality tactical bias in credit markets despite further tightening of valuations.

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