With valuations back to pre-conflict levels, UBS recommends prioritizing carry rather than adding directional risk
AI summary card
With valuations back to pre-conflict levels, UBS recommends prioritizing carry rather than adding directional risk
UBS believes the recent oil price/geopolitical shock has primarily been reflected in yield repricing, while credit spreads have remained relatively resilient. At present, it is more appropriate to capture carry through structures such as Europe versus the US, front-end versus long-end, cash bonds versus synthetic indices, and HY versus IG.
- So far in 2026, markets have gone through two bouts of volatility—the February tech sell-off and the Middle East conflict—but credit spreads have shown clear resilience relative to rates.
- The report judges that recent pricing has mainly been a yield story rather than a spread story, and rates are one of the few asset classes that have not shown pricing complacency toward the oil shock.
- UBS maintains its medium-term view that spreads will widen later this year, with private credit as the main risk, but the short-term market risk balance tilts toward de-escalation.
- Current preferred carry trades include being long Europe versus US spreads, long the front end of the credit yield curve versus the long end, long cash bonds versus synthetic indices, and long HY versus IG.
Report interpretation
Overview
This report discusses how multi-asset investors should reallocate portfolios after global asset valuations returned to pre-Middle East conflict levels. UBS points out that the two major volatility events in 2026 have not materially changed structural positioning; credit spreads have remained resilient relative to rates, and the market appears to be repricing through yields rather than spreads. Against this backdrop, the report recommends that investors prioritize carry income and reduce pure directional risk exposure.
Core views
The core views are: first, the adjustment in credit markets caused by oil prices and geopolitical shocks has mainly shown up in yields, while spreads have not widened significantly; second, post-conflict valuations have basically returned to pre-conflict levels, reducing investors’ willingness to add further downside protection; third, although UBS still worries that private credit risks could push spreads wider later this year, the better portfolio action at present is structural positioning aimed at maximizing carry; fourth, the model favors Europe over the US, cash bonds over CDS, HY over IG, and selected front-end/long-end curve positioning.
Analysis framework
The report uses a multi-asset carry-to-volatility framework to compare carry-to-volatility ratios across regions, maturities, credit ratings, and instrument types. Combined with a 3-month volatility window, historical percentiles, OAS simulations, and optimized portfolio results, it assesses which credit exposures are currently more attractive on a risk-adjusted basis.
Methodology notes
Measures the attractiveness of risk-adjusted returns across different assets or maturity buckets using the ratio of carry to volatility.
The model provides an optimized allocation recommendation every three months, aiming to improve multi-asset portfolio returns without materially increasing directional risk.
Incorporates both the tech sell-off and the Middle East conflict into recent volatility estimates.
Because recent volatility has entered the model window, the screening results for most maturity buckets have weakened versus the previous update.
Assesses key levels for indices such as CDX IG, CDX HY, iTraxx Main, and iTraxx Xover through option-adjusted spread scenario analysis.
The report uses OAS simulations to help judge the price and risk behavior of different credit indices under spread-change scenarios.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- European credit spreads vs US credit spreadsPrefer long Europe relative to the US
- Strengths
- Relative European positioning is more attractive on a carry basis in the model, and the report recommends maintaining a long Europe vs. US bias.
- Weaknesses
- If Europe’s macro or energy shocks worsen, the relative advantage may narrow.
- Comparison
- Compared with the US, Europe screens better across some maturities and indices.
- Risks
- Geopolitical conflict, energy prices, European growth risks, and renewed widening in credit spreads.
- Cash bonds vs synthetic credit indices/CDSPrefer cash bonds relative to synthetic instruments
- Strengths
- Cash bonds appear more attractive on a carry-to-volatility basis.
- Weaknesses
- Cash bonds are generally less liquid than CDS, and transaction costs may rise during periods of stress.
- Comparison
- CDS volatility has risen significantly due to demand for liquid hedging, weakening its risk-adjusted attractiveness.
- Risks
- Liquidity contraction, sharp jumps in credit spreads, and changes in hedging costs.
- HY vs IGPrefer HY relative to IG within synthetic instruments
- Strengths
- The model recommends increasing credit beta within synthetic credit, especially HY relative to IG.
- Weaknesses
- HY is more sensitive to the credit cycle and default risk.
- Comparison
- Compared with IG, HY offers higher carry but also higher downside risk.
- Risks
- Spillover from private credit risks, rising default rates, and tighter financing conditions.
- Front end vs long end of the credit yield curvePrefer more granular maturity positioning
- Strengths
- European 1-3 year credit and US IG 1-3 year screen well, while long-end HY volatility in some cases remains near the long-term average.
- Weaknesses
- Maturity positioning is sensitive to changes in both the rates curve and the credit curve.
- Comparison
- The report notes that the carry tables are almost entirely ordered by maturity when ranked by yield, reflecting repricing at the yield end.
- Risks
- Another sharp move in the yield curve and rising rate volatility.
Key data
- Major volatility events in 20262These were the February tech sell-off and the Middle East conflict, respectively.
- European 1-3 year creditProbability of loss over the next 12 months below 15%The report believes Europe’s ultra-short end is the most attractive in the carry screen.
- US/European HY long-end volatilityClose to the long-term averageIn contrast to other assets, whose volatility has risen to around the 65%-70% historical percentile.
- Degree of curve flattening abnormalityLess than about 4% of cases over the past 30 yearsThe report says the current sharp curve flattening is rare outside hiking cycles.
- Recommendation completion time2026-04-28 10:51 AM GMTThe disclosure section shows the recommendation was completed at this time.
Impact & implications
For investors, the implication of the report is not simply to chase the rebound in risk assets, but to refocus on the quality of income generation after valuations have recovered. If the conflict continues to de-escalate, credit carry can still provide an income source; however, if private credit risk, policy shocks, or energy prices disrupt markets again, simply adding credit beta may face drawdowns. Therefore, the report favors relative value, curve positioning, and instrument selection rather than unconstrained additions to directional exposure.
Risks
- Multi-asset investing faces market risk, credit risk, interest-rate risk, and foreign-exchange risk.
- Correlations between different asset classes may deviate from historical patterns.
- Geopolitical events and policy shocks may reduce asset returns.
- During periods of high volatility, insufficient liquidity, and economic dislocation, valuations may be adversely affected.
- UBS still believes private credit risk could push spreads wider later this year.
- Options, structured derivatives, futures, and OTC derivatives are not suitable for all investors and carry high trading risk.
What to watch
- Whether the Middle East conflict continues to de-escalate or re-escalates.
- Whether private credit risk spills over from private markets into public credit spreads.
- The relative performance of European versus US credit spreads.
- Differences in volatility and liquidity between cash bonds and CDS.
- Whether credit beta in HY relative to IG can still earn sufficient carry compensation.
- Whether the rates curve and credit yield curve continue their unusual flattening.