HOUSE_OVERSIGHT_025270.jpg

Bonds overview Government bonds - Key points e We expected government bond yields to move towards slightly higher ranges over the next 6 months, as seen in late 201 1/early 2012. This is likely to have a slightly negative effect on most developed government bond prices, and is likely to result in a total return around zero over this period. Price fluctuations in the month ahead could originate from developments in the Eurozone and the US. They include the Troika report on Greece, Spanish local elections/referendum and the possible delayed request for additional ECB support in Europe. In the US, the extent of the fiscal cliff is dependent on the election outcome and the results from the debates in the subsequent lame duck session of congress. While we expect the full cliff to be avoided, it poses a significant downside risk to domestic growth. * Overall, we suggest keeping the duration close to neutral, as we expect global growth to remain lackluster and central banks to continue supporting bond markets. Corporate and emerging market bonds - Key points ¢ We maintain a preference for investment-grade (IG) and US high-yield (HY) corporate credit. A strong (US) corporate sector, the ongoing moderate recovery of the US economy, determined central bank support and a strong technical backdrop are likely to further support credit segments. ¢ Investment-grade corporate bonds have achieved a total return of more than 10% so far this year, at remarkably low volatility. While absolute returns will likely be moderate in the next six months (1-2%), the asset class should continue outperforming government bonds, offering higher liquidity than HY bonds. We see the highest return potential in the lower-rated IG segments (BBB and A). e US corporate bonds of lower credit quality (HY) remain fundamentally supported by solid balance sheets and a benign US growth outlook. Given the low risk of default losses, valuations are attractive at an effective yield of above 6%. For US HY, we expect mid single-digit total returns in the next six months. US senior loans are an attractive alternative to traditional fixed income assets. e Emerging market (EM) bonds should continue to benefit from better fundamentals than those of developed markets over the medium term. However, valuations have now moved towards a fair level for sovereign bonds (in USD) and we take profits on selected sovereign bond issuers. For EM corporate bonds in USD, there is still some potential for spreads to trend lower in the quarters ahead, and we continue to recommend this area as a ClO-preferred theme. 2 UBS Preferences (6 months) short duration USD EUR (DE) GBP JPY CHF CAD AUD Bonds total Bnew underweight neutral old neutral long duration overweight Government 1 bonds Investment grade corporate bonds High yield bonds Emerging market bonds Bnew old Source: UBS CIO WM Global Investment Office 23 For further information please contact ClO's asset class specialists Achim Peijan, achim.peijan@ubs.com and Daniela Steinbrink Mattei, daniela.steinbrinkmattei@ubs.com Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025270