Oil Shock 2.0: Growth Risks Are Rising, But Credit Markets Remain Unfazed

UBS warns that bond markets are underestimating the growth drag of the current oil shock despite rising yields. They recommend a defensive posture favoring high-quality, non-cyclical sectors as tight credit spreads leave little room for error.

Key Takeaways

• 1.Bond yields have reached two-year highs following the start of the Iran war, appearing attractive, yet tight spreads provide minimal protection against growth disappointments.
• 2.Markets are currently pricing inflation risks more heavily than the potential economic growth drag caused by a sustained oil price shock.
• 3.UBS maintains a defensive stance, preferring high-quality bonds in sectors like utilities, telcos, and oil/gas over energy-intensive cyclical and consumer discretionary sectors.

Table of Contents

• Oil as a tax on growth—Why it still matters
• Sector impact: Where credit risks are highest
• Scenario thinking: What if oil prices stay elevated
• Markets are pricing an inflation shock, not growth risk
• Positioning implications
• UBS CIO risk views
• UBS CIO valuation views
• Sell recommendations
• Issuer valuation views
• Required Disclosures

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