UBS is optimistic about investment-grade corporate bonds. Here’s the reason.

Are you an income investor looking to capitalize on the current market conditions? Look no further than investment-grade corporate bonds. While yields may have dipped slightly from last year’s highs, there is still plenty to like about this asset class, according to experts at UBS.

The effective yield on the ICE BofA U.S. Corporate Bond Index is currently around 5.5%, down from 6.4% in October. Despite this decrease, investment-grade bonds have seen a 1.1% increase in excess return year to date, outperforming Treasury bonds. This has been attributed to a strong primary market issuance in investment-grade debt, leading to an increase in the average market-weighted coupon to 4.2%.

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UBS recommends focusing on the financial sector over nonfinancial issuers within the investment-grade market. They also suggest favoring short- and intermediate-term duration bonds, with the belief that longer-term bonds will perform well in total return due to anticipated lower nominal yields by year-end.

Additionally, UBS notes that the spread pickup from A-rated bonds to BBB-rated bonds is historically tight. However, they maintain a neutral stance on As versus BBBs, citing a benign outlook on credit fundamentals.

Overall, with receding inflation, moderating growth, and strong corporate profits, UBS predicts that spreads over Treasurys will remain resilient in the investment-grade market. This, coupled with the increasing market-weighted coupon, makes investment-grade corporate bonds an attractive option for income investors seeking stability and potential return.

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