How should investors reallocate their portfolios this summer to maximize carry?

UBS analysts are forecasting a summer ripe for strategic portfolio adjustments to maximize carry, with a focus on short-term European investment grade (IG) debt and strategic diversification.

In a note dated Tuesday, analysts at UBS said they see a return to stability in credit spreads across Europe, particularly in the high yield (HY) space, following recent volatility triggered by the French elections.

Recommendations for enhanced summer carry

Prioritizing Short-term European IG: Analysts at UBS underscore the attractiveness of short-term debt (3-5 years) within the European IG universe. This segment offers particularly compelling yields in light of the recent inversion of the yield curve.

Re-embracing US IG Bonds: For the first time in nearly two years, UBS recommends incorporating US IG bonds (7-10 years) into your carry strategy. This strategic shift reflects an evolving market outlook.

Diversification with GBP IG: British Pound IG bonds (5-7 years) are recommended for their low correlation to the S&P 500 and their potential to generate attractive carry.

Strategic Risk Reduction: UBS advises reducing exposure to riskier assets such as European HY (3-5 years) and credit default swaps (CDS) like ITRX Main.

Emerging Markets (EM): While cash remains preferable to EM exposure for the immediate term, “Cash + Synthetic” investors can cautiously re-enter the EM market at benchmark weight. Synthetic-only investors have the flexibility to increase their EM allocation as well.

Maintaining Long HY Positioning: The report recommends maintaining a long HY versus IG position in both the US and European markets.

UBS model recommendation

Cash + Synthetic Investors: Increase allocation to US IG (3-5 years), reduce exposure to EU HY (3-5 years) and ITRX Main, cautiously re-enter EM at benchmark weight, and maximize allocation to GBP IG (5-7 years).

Synthetic-Only Investors: Increase allocation to US IG (3-5 years) and EM exposure, maintain a long HY versus IG position in both regions, and reduce exposure to ITRX Main