UBS Equities-Global Strategy _2026 US Credit Outlook Navigating Tight Sp...-119699056

ab12 January 2026Global ResearchPowered byUBS Evidence LabYESGlobal Strategy2026 US Credit Outlook: Navigating Tight Spreads and Lingering RisksExecutive SummaryWe mark to market our 2026 outlook, highlighting changes in our spread forecasts, portfolio positioning, and underlying credit fundamentals.Spreads: Less Widening Early, Though Risks RemainWe now expect less spread widening in Q1 (targets: IG 90, HY 325, LL 500bp), reflecting strong performance into year-end ‘25, a milder growth slowdown, and resilient corporate credit metrics. However, January’s seasonal rally typically fades, and we still anticipate material widening in February and March. We believe that current tight spreads underprice growth risks tied to a weak labor market, sluggish consumer trends, and private credit fragilities.Portfolio Positioning: Incrementally Longer Credit RiskOur year-end spread forecasts are unchanged (IG 85, HY 300, LL 480bp); updated excess return forecasts continue to favor US leveraged loans (3.8%) and high yield (1.4%) over investment grade (0.3%) for 2026. The US model portfolio moves close to neutral on duration given uncertainty/ offsetting catalysts tactically for the rates outlook, but shifts incrementally longer credit risk as we close two trades: short HY Retail vs. Index (the view played out into year-end) and long BBs vs. HY Index (moderated US growth risk in H1, which makes us less defensive). Core longs remain in IG Tobacco and HY Industrials, while core shorts stay in IG Tech and private credit-exposed Financials.Macro & Fundamentals: Growth Risks EasingOur economists raised 2026 US real GDP growth to 2.1% (+0.3pp) and forecast a shallower labor market slowdown in H1. Credit-based recession risk has fallen to 23%, driven by stronger corporate profits and improved credit health scores, led by high yield. Offsetting this in part, the timeline for Fed cuts is now expected in Q3, delaying further policy support.Private Credit: Risks Persist But No Near-Term ShockPrivate credit concerns remain, but the near-term outlook is not deteriorating sharply. Positives include lower leveraged loan default rates into year-end and debt-weighted private bankruptcy filings below average. However, this doesn’t mean that we are out of the woods: distressed ratios ticked higher in December, and count-weighted private filings are still rising. Additionally, sector trends show renewed stress in services and tech even as healthcare filings eased. We expect a modest rise in HY and LL default rates to 1.0% and 2.5%, respectively, for FY26.Consumer Credit: K-Shaped EconomyConsumer indicators remain mixed. December payrolls was weaker than expected, with growth in employment narrow. UBS Evidence Lab's December Consumer Finances survey suggested that the income outlook for consumers is stable, and cash flow pressures are near average, but more consumers are expecting to miss payments due to job losses. This aligns with the Fed's CES survey noting job loss beliefs