UBS Warns Rising Rates Will Split Bond Market Into Winners and Losers

Matthew Misch, a UBS strategist, noted in a Wednesday note that “higher rates should widen the gap between stronger and weaker borrowers across sectors and ratings.” He added that the quality of individual bonds becomes more important as rising rates expose differences in creditworthiness.

Most public credit markets show average to slightly above‑average balance‑sheet health, Misch observed, while issuers with lower financial leverage display weaker fundamentals. He said BB‑rated borrowers are in a considerably better position than single‑B or CCC counterparts, citing stronger balance sheets, greater financing flexibility, and easier access to capital markets.

The note also referenced the iShares BB Rated Corporate Bond ETF (HYBB) and explained that high‑yield bonds are those rated BB+ and below by S&P, or Baa1 and below by Moody’s.

Credit spreads are widening. As of Friday, high‑yield spreads reached levels not seen since April, according to the Federal Reserve Bank of St. Louis. Wider spreads signal that investors demand extra yield for holding riskier corporate debt. CCC‑rated bonds have seen spreads jump from 800 basis points to 1,128 basis points over the past year (one basis point equals 0.01%). BB‑rated spreads rose to 176 basis points last week—the highest since July—up from 153 basis points, though still below the yearly peak.

Investors are also watching upcoming maturities. Many companies that locked in low rates during the pandemic will need to refinance at today’s higher levels. Although a sizable amount of debt is set to mature through 2028, roughly three‑quarters of those maturities fall in the final year of that window, Misch noted. He argued that the critical issue is not the overall size of the “maturity wall” but which borrowers retain access to capital markets.

The biggest pressure points, according to Misch, remain CCC‑rated issuers, private credit, and U.S. leveraged‑loan software—segments that combine weak fundamentals, high refinancing needs, and limited ability to absorb higher financing costs. He added that refinancing risk is concentrated rather than systemic.

Turning to the winners, Misch said higher‑quality high‑yield borrowers are best equipped to handle costlier financing, but the story goes beyond balance sheets. “If higher rates persist, earnings resilience will matter just as much as leverage,” he wrote. UBS continues to favor issuers with strong balance sheets, durable cash flows, ample liquidity, and steady access to capital markets. BB‑rated firms continue to stand out.

Sector‑wise, Misch expects utilities to benefit from defensive cash flows and limited sensitivity to slower growth. He is cautious about technology, communications, and CCC‑rated credit. Within investment‑grade corporates, he prefers consumer non‑cyclicals, which should enjoy downside protection from stable demand and resilient earnings. He is avoiding financials and technology; while financials usually have solid balance sheets, higher‑rate periods have historically yielded weaker relative performance versus more defensive sectors. Technology faces headwinds from duration sensitivity, elevated issuance, and ongoing investment needs tied to artificial intelligence.

— CNBC’s Jeff Cox and Justin Zacks contributed reporting.

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