UBS: Top Credit Trades to Position for Disruption & Key Risks in 2026
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Despite brief year-to-date spikes in credit market volatility, UBS notes that overall volatility levels in both the US and Europe remain historically low. The firm continues to favor long spread and carry trades globally but urges vigilance against left-tail risks, including weaker economic data, AI-driven disruption, and rising vulnerabilities within private markets.
To hedge these risks, UBS introduced three new trades to its portfolio. First, the firm recommends going long European high-yield tech debt against a short position in US high-yield tech debt. The US tech high-yield sector faces greater exposure to AI disruption subsectors and has recently underperformed its European counterpart. Second, UBS advises shorting US leveraged loan services against US leveraged loan manufacturing, expecting the services sector to price in a higher disruption risk premium. Third, the firm suggests shorting European high-yield retail bonds against the broader European high-yield index, leveraging the retail sector's historically higher beta during spread-widening events.
Globally, UBS maintains a preference for European investment-grade credit over US investment-grade credit on a volatility-adjusted basis. The narrowing growth differential and favorable technicals support European credit, while the US is expected to lead spread widening by the end of the first quarter. UBS anticipates US spread peaks at 90, 325, and 500 basis points for investment-grade, high-yield, and loans, respectively, while remaining neutral on duration.