UBS sees bond spreads widening slightly

NEW YORK: US corporate bond spreads may widen modestly from current levels by the end of the year, but generally demand for the bonds is strong and companies are performing well, according to strategists at UBS Group AG. Spreads on US blue-chip bonds could widen to 95 basis points from their current level of 88 basis points, strategists led by Matthew Mish wrote in a June 12 note.

Meanwhile, spreads on junk bonds may be pushed out to 325 basis points from 305 basis points.

On a total return basis, high-grade bonds could gain about 5.8%, outperforming high-yield debt which is forecast to gain 5.2%, they wrote.

“These are equity-like returns, and that is a strong statement in support of credit as an asset class,” Mish said.

“We are not seeing an acceleration of stress, if anything we are seeing a bit of relief.”

Corporate earnings growth has been solid, debt growth has been low, and consumers have been relatively resilient, the strategists noted.

“Canaries in the coalmine for the credit cycle are singing albeit softly,” they wrote, citing rising defaults among leveraged loan borrowers as well as across office buildings. — Bloomberg