UBS Says Junk Bonds Are Best Placed to Weather Geopolitical Storm

(Bloomberg) -- U.S. high-yield debt is well positioned to ride out volatility caused by Russia's invasion of Ukraine, according to UBS. 

“High yield remains fundamentally solid,” UBS strategists led by Matthew Mish wrote in a note. “There are very limited signs of distress.”

The biggest risk is global investors with Russia/Ukraine exposure having to sell U.S. credit to raise liquidity amid outflows, according to UBS. 

U.S. junk debt has outperformed relative to Europe, emerging markets and Asia while “systemic risks appear contained,” said UBS in the note released late Wednesday. They add that leverage is in the bottom quartile, while interest coverage is at a record high. 

“HY outflows have stopped, dealer positions are well below average, and rising stars are lowering net debt,” wrote the strategists. 

UBS recommends investors buy B rated bonds and debt in the financial and communications sectors. They advise being underweight consumer cyclical and non-cyclical bonds. 

Overall direct exposure to Russia and Ukraine in terms of revenue is “negligible” for issuers of U.S. high-yield bonds and leveraged loans, according to UBS. 

High-yield debt in Europe and Asia “will offer the better total return prospects through year-end for patient investors,” the strategists added.

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