UBS Equities-Global Strategy _US Credit outlook 9 key themes for the fal...-117601414

ab2 September 2025Global ResearchPowered byUBS Evidence LabYESGlobal StrategyUS Credit outlook: 9 key themes for the fallExecutive summary: Recession risks remain elevated but have stabilized compared to the previous period. Lending conditions among non-bank institutions eased further in August, continuing a gradual improvement. Corporate bankruptcy filings remain high, driven by private firms, though the pace of growth has slowed. Consumer credit health has deteriorated QoQ on fading sentiment, but remains stable with no critical warning signs. Expectations for a September Fed rate cut are largely reflected in current market pricing, and its impact is expected to be limited given tight corporate spreads. However, a rate cut is likely to support inflows into IG credit. Credit spreads are projected to be less volatile and widen moderately into year-end, with US IG credit expected to show greater resilience due to reinvestment of coupons and low net debt growth. Our latest year-end spread forecasts for IG, HY, and LL are 95bp, 325bp, and 460bp; US IG total returns should outperform US peers but Europe will likely be a close second. Recession risk: credit model at 41% but stable sequentially The UBS credit based recession model for the second quarter rose three percentage points to 41%, driven by incremental deterioration in non financial leverage and interest coverage. The elevated level is mainly due to rising non-performing loans, declining interest cover as net interest expense rises, and GDP-based domestic non-financial profit growth hovering in the low single digits - well below reported S&P 500 earnings. Our broader indicator is also elevated but stable at 52%.Non-bank lending conditions: net 4% tightening in August, a bit lowerThe UBS non-bank liquidity indicator was at 4% net tightening through August compared with the Fed senior loan officer survey showing 8.2% of banks tightening C&I loan standards for small firms through Q2. The trend in recent months has been incremental easing in both non-bank and bank lending standards, acknowledging that the level remains modestly in tightening territory. Growth in bankruptcies eased to 23%, but service sector filings spikedCorporate bankruptcy filings through August remain elevated due to private firms, but the growth rate fell from a peak near 60% YoY in late July to 23% by end-August. At the sector level, the outlook was more mixed: real estate, construction, and service sectors registered the highest filings. Among the top private credit sectors, defaults in services are rising back near the highest levels post-COVID. Conversely, tech filings declined, while healthcare bankruptcies remain below average. US consumer health indicator: some deterioration q/q as sentiment fades Our US consumer credit cycle indicator remains weaker than average at +0.3, up 0.1pp q/q, as the rebound in consumer sentiment since Liberation Day fades. Overall, the indicator is below the levels of +0.4 and +0.6, which are