Fixed Income Strategist - UBS

Fixed Income Strategist Monthly February 2020

Minsky moments and black swans

Our review of key topics influencing the taxable fixed income landscape, with an assessment of relative value trends at the sector and individual security level.

This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosuresbegin on page 26.

Dear readers, In this issue of Fixed Income Strategist, we discuss the market's fear of a Minsky moment in financial assets. We review what this means and walk through the three phases of this theory.

We show how corporate borrowing, although rising over past decade, is not a cause for alarm when looking at corporate profits and historically low defaults.

We discuss how the main risk to financial assets is a sharp rise in interest rates, which has the potential to impact the current inter-est coverage ratios and ultimately cash flows.

Even with the recent market correction, Treasury yields remain low and spreads are on the tighter side. Analyzing an asset yield per unit of duration is therefore a great indicator if an investor is ade-quately being paid for embedded interest rate risk.

Finally, we review our asset class recommendations which consti-tute a barbell strategy, taking duration risk in the TIPS market and adding incremental yield via floating rate senior loans and short-end IG corporates.

As always, thoughts and comments are welcome.

Leslie Falconio Senior Fixed Income Strategist UBS CIO

Contents

03 Feature

05 FI tactical preferences

06 Allocations and recom-

mendations

08 US Treasury

09 Mortgage-backed securities

10 IG corporate bonds

11 High yield corporate bonds

12 Preferreds

13 Taxable municipals

14 Chartbook

22 Detailed asset allocation

23 Disclaimer

Authors Leslie Falconio [email protected] 212.713.8496 Barry McAlinden, CFA [email protected] 212.713.3261 Kathleen McNamara, CFA, CFP [email protected] 212.713.3310 Frank Sileo, CFA [email protected] 212.713.4824 Daniel Kelsh [email protected] 212.713.3959

Editor Thomas McLoughlin [email protected] 212.713.3914

Fixed Income Strategist

CIO GWM 7 February 2020 2

FEATURE

Minsky moments and black swans Leslie Falconio

IG growth, leverage and tight spread has been a focus point

Source: UBS as of 31 December 2019

Corporate Net debt to GDP has declined since the crisis as profits rise and defaults remain low

HY default rates in % (lhs); Debt/GDP in % (rhs)

Note: Gray bars indicate recesssions Source: Bloomberg, UBS as of 31 January 2020

IG Market increased Rising LowerCorporates Growth credit risk leverage risk premium

Dec-08 2.5 31% 1.8x 204

Dec-19 6.9 47% 2.7x 90

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jan

-70

Jan

-72

Jan

-74

Jan

-76

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

Jan

-14

Jan

-16

Jan

-18

Jan

-20

HY Default rates Net Debt/GDP Gross Debt/GDP

In the last two editions of Fixed Income Strategist, we outlined the declining risk premiums investors have faced giv-en the flood of central bank liquidity and the heightened demand from in-ternational investors disenchanted with negative yields overseas. Although the recent volatility due to fears from the coronavirus has loos-ened spreads a touch, overall credit spreads remain on the tighter side of the expansion spectrum. Lower-for-longer interest rates, relaxed financial conditions, and rising corporate bor-rowing have many naysayers chanting “Minsky moment!” Named after a hypothesis of the economist Hyman Minsky, a Minsky moment is a sudden collapse in asset values as part of the credit or business cycle. Such moments occur when long peri-ods of thriving investment result in in-creased speculation using borrowed money, ultimately leading to crumbling asset prices. In other words, stability is inherently destabilizing. Why? Accord-ing to this theory, risk appetite increas-es as the expansion endures. Some

lending standards become less conservative. Borrowers don't expect their cash flows to cover principal or interest; rather, they believe rising prices in the under-lying asset will enable them to repay their debt and make a profit.

This final phase has received a lot of attention on Wall Street lately and gar-nered significant media attention. Some believe it is a byproduct of overaggres-sive central bank policies. With the Fed-eral Reserve once again increasing its balance sheet to provide liquidity via T-bill purchases, and with the People's Bank of China readily adding a net USD 21.4 billion of funds and trimming rates by 10bp to "ensure ample liquidity dur-ing [a] special period of virus control," aggressive monetary policy as the prin-cipal support for asset prices remains a spotlight risk. Although the US economy is far from booming, the Minsky followers believe this central-bank-driven economic cycle is inflating asset prices rather than con-sumer prices, thanks to years of zero

observers have cited conditions within the high yield market—yields have de-clined from 22% during the financial crisis, to 8% in 2011, to 6% in 2018, to the mid-5% level today. Minsky fol-lowers view this as a cautionary tale. Denied market access a decade ago, risker companies now can borrow at remarkably low interest rates. The re-sult: corporate borrowing increases alongside an increase in corporate lev-erage (below). The Minsky minions Three stages of lending ultimately lead up to a Minsky moment correction:

1. The hedge phase—the most sta-ble phase. Borrowers' cash flows cover interest payments. Lending standards remain high.

2. The speculative phase—risk in-creases. Borrowers' cash flows cover only their interest pay-ments, but not principal. Bor-rowers believe that interest rates will not increase, and that the value of their assets will continue to grow.

3. The Ponzi phase—the riskiest phase. In a booming economy,



Are you really being compensated in yield for incremental risk?

In yields

Note: Yield is based on yield to maturity along with modified duration Source: Factset, UBS as of 6 February 2020

HY interest coverage remains strong due to lower interest rates Coverage ratio (LTM EBITDA/Net LTM Interest Expense)

Source: ICE BofA, UBS as of 21 December 2019

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

CMBS HY Pref MBS Corp IG Muni Tax-Muni

Yield/Duration ratio

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

HY Coverage Ratio

interest rate policies (ZIRP) and negative interest rate policies (NIRP). In other words, the high level of risk-taking has gone on largely unabated thanks to the global search for yield and the enduring strength in equity and leveraged finance markets as yields remain low. Combin-ing this with low volatility and contin-ued monetary stimulus so late in the expansion, investors now fear a Minsky moment is around the corner. They may want to pull up a chair. In our view, household wealth and higher in-come-to-debt ratios, combined with tighter financial regulations, are likely to postpone the Minsky moment for quite some time. Yes, the large liquidity injec-tions over the past several years, com-bined with the low level of interest rates, have incentivized companies to borrow. But they have not done so as aggressively as it may appear. We show both the gross and net corporate debt-to-GDP, alongside high yield default rates, going back to 1970. Gross debt includes intragovernmental debt (cash and cash-like assets); net debt excludes it. In our opinion—and the Congres-sional Budget Office agrees—net debt is the more appropriate trend to follow. Although it may not be at the 2000 low, it is back to pre-crisis levels. If the market is already pricing it in, can it be considered a risk? The risk to fixed income assets, and a “fat tail” event for corporate debt, is a large rise in US interest rates. This was recently stated in the Fed’s Financial

Stability Report, and we agree. Over the past several weeks, due to the unknowns from the coronavirus and the production stoppage of the 737 Max at Boeing, the consensus 1Q20 GDP growth forecast has moved down from 2% to 1.5%. The market is now pricing in two Fed eases by year-end. The Fed’s five-year-forward breakeven inflation forecast has fallen 10 basis points to 1.73% on the heels of the January col-lapse in oil prices, while 10-year yields fell roughly 40bps in one month. Given market expectations, could an unexpected rise in interest rates be a black swan? We continue to believe there will be a cap on how high interest rates can go—potentially 2.25% during 2020—particularly if US manufacturing fundamentals come into focus. After all, 10-year yields only rose to 3.24% in 2018, which was very low from histori-cal standards. And yet, the pace of eco-nomic growth slowed perceptibly. Several reasons explain why market participants are concerned about rising interest rates. First, given the large de-cline in rates in 2020, combined with spread compression, investors are not offered much in terms of yield per unit of duration. This ratio calculates what percentage rise in interest rate will off-set a bond's yield. If the ratio is 1, it will take a rise of 100bps (1%) over a 12-month period to offset the yield. The lower the ratio, the less rates need to move. We show this ratio for the major

fixed income asset classes. Due to the longer duration and tight spreads of investment grade corporates, the yield per unit of duration is only 0.34. There-fore, if interest rates rise to 2.5% over the next 12 months, around 1% higher than today, the IG index would lose more than 3%. Any given change in interest rates will have a bigger effect on returns if rates are low to begin with! And what about the debt? Even Minsky's adherents agree that although corporate debt has risen, in-terest coverage ratios remain healthy in this lower-yielding world (below). The fear, however, is that higher yields will stunt economic growth and reduce cor-porate cash flows. We do not foresee this to be an issue given we don't antic-ipate a large rise in interest rates over the next 12 months. However, that is the risk the market should be focused on given the large shift in sentiment we have witnessed over the past few weeks. We continue to support a barbell ap-proach, taking on interest rate risk via the TIPS market, while allocating to credit with floating-rate senior loans, and short-end IG corporates where the yield per unit of duration and the breakeven spreads side with the inves-tor.



Legend

Overweight: Tactical recommendation to hold more of the asset class than specified in the UBS House View Detailed asset allocation tables, 7 February 2020 Underweight: Tactical recommendation to hold less of the asset class than specified in the UBS House View Detailed asset allocation tables, 7 February 2020 Neutral: Tactical recommendation to hold the asset class in line with its weight in the UBS House View Detailed asset allocation tables, 7 February 2020

NOTE: TACTICAL TIME HORIZON IS APPROXIMATELY SIX MONTHS, AS OF 7 FEBRUARY 2020

GRAPHIC PERTAINS TO THE HOUSE VIEW MODERATE RISK TAXABLE ASSET ALLOCATION

US Fixed Income Preferences Fixed Income Strategist


Taxable allocations & recommendations We updated our taxable fixed income asset allocation table to reflect the changes in the strategic asset allocation in UBS House View and the updated capital market as-sumptions. Our goal with this table is to provide investors with a more detailed road map of UBS House View.

US taxable fixed income allocation Conservative Moderate Aggressive

Treasuries We are underweight nominal US Treasury with a preference for US TIPS securities. The recent threat out of China has pushed US Treasury yields below our lower band of 1.6%. With a low of 1.5%, we would not add interest rate risk at these levels.

32.5

16.0

5.5

Short 17.5 7.0 0.0

Intermediate 7.5 4.5 0.0

Long 7.5 4.0 5.5

TIPS We remain overweight TIPS with a preference for the 5-year area of the curve. Although WTI oil has declined given concerns over the virus, the break-even inflation rate held in well. As a resultfive year real yields have turned negative benefitting TIPS. We remain overweight.

9.5

10.5

4.0

Short 3.0 3.0 0.5


Long 1.5 1.5 1.5

Agency debt We are underweight agency debt versus MBS and IG corporates. Lower liquidity and tigher spreads reinforces the better carry and total return view with other investment grade spread product.

9.0

6.0 0.0

Short 6.5 4.0 0.0


Long 1.0 0.0 0.0

Mortgage backed securities

After spreads widened out as volatility increased and interest rates fell due to the coronavirus scare, we remain neutral but positive on the sector as liquidity, AAA credit, and cheap relative to corporates. We remain in the sector as household balance sheets remain solid.

18.5

22.5

12.0

Short 8.0 10.0 3.0


Long 2.0 0.0 2.5



Allocations and recommendations (cont'd)

US taxable fixed income allocation Conservative Moderate Aggressive

MBS/Securitized Products

MBS credit has outperformed corporates the first month of the year. Although we anticipate this to continue we remain neutral until volatility subsides with a preference for Agency and non agency CMBS.

9.0

10.0

12.0

Short 4.0 5.0 3.0


Long 1.0 0.0 0.0

Investment grade corporates

We are neutral on IG corporate bonds. As spreads are unlikely to tighten much further from here, we expect returns to be mostly driven by carry and underlying Treasury yield changes. Consequent-ly, we think that IG bond yields are a good estimate for 2020 returns in the low- to mid-single-digit range. We favor financials (US banks) over non-financials and bonds with short maturities (1- 3 years) with attractive yield relative to their low duration.

10.0

12.5

13.0

Short 4.0 6.0 4.0


Long 3.3 2.5 4.5

High yield corporates

We are neutral on HY bonds. We note the relative outperformance of BB credit in 2019 and are mindful of the limited potential for returns to exceed coupon income in the upcoming year. We believe that leveraged loans continue to represent a differentiated segment of HY, although de-clines in LIBOR rates are a drag on income for the asset class.

4.0

10.5

34.0

By credit rating

BB-rated We are neutral on BB-rated credit. Throughout 2019 BB spreads demonstrated strength and outperformed lower tiers of credit. Spread levels at the beginning of the year limit the opportunity for BB credit to duplicate prior year's returns.

4.0 5.0 5.5

B-rated We are neutral on B-rated credit. Concerns over market conviction in the credit rally and the threat from geopolitical challenges prevented this segment from outperforming BB-rated credit during 2019. Investors seeking incremental return via credit risk need to be mindful of idiosyncratic credit events and the advanced stage of the economic cycle.

0.0 5.5 28.5

Taxable municipals

We have slight to moderate underweight positions on taxable municipals but see room for posi-tioning these as a carve-out exposure within an investors' government fixed income allocation. 4.5 3.0 1.5

Preferred securities

We are tactically underweight preferreds, given the tight spreads and 2019 performance. We favor high coupon fixed rate preferred and fixed-to-floats with at least four years of call protection, high reset spreads, and strong prospectus language regarding floating-rate coupon calculation in the absence of Libor.

1.5 2.0 6.0

Bank loans We are overweight senior loans as a carve-out exposure within an investors' high yield bond allocation. The repricing wave should lose momentum and we expect the drag on coupons to diminish, but not disappear in the months ahead. 1.5 7.0 12.0

Note: See Appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations. Source: UBS, WMA AAC, as of 7 February 2020



US Treasury

Over a weeks time, the market shifted their 12m interest rate projections substantially lower

Yield, in %

Source: Bloomberg, UBS as of 5 February 2020 (p): projection

5-year real yields collapse on declining oil prices and nom-inal yields

5-year real yield and BEI, in % (lhs); WTI oil price, in USD (rhs)

Source: Bloomberg, UBS as of 5 February 2020

1.20

1.40

1.60

1.80

2.00

2.20

2.40

3MO 6MO 1YR 2YR 3YR 4YR 5YR 10YR 15YR 30YR

1-yr (p) Jan-20 1-yr (p) Feb-20 UBS (p) Dec 20

40

45

50

55

60

65

70

75

80

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2017 2018 2019 2020

5-year real yield 5-year BEI WTI oil (USD)

Making the rounds On the heels of the uncertainty regarding the coronavirus, the 10-year Treasury yield declined around 40bps in Janu-ary, reaching 1.5% and breaking through our lower ex-pected band of 1.6%. However, this large decline was short-lived as sentiment fears became more contained. US manufacturing indicators such as the ISM rebounded above 50. Today the market is back to 1.65%, and although we cannot completely discount the potential of hitting the 1.43% low in 10-year yields reached last year, the market has repriced to a slower growth outlook. Currently, the market is counting on two Fed eases in the second half of the year. This, along with the shift in market sentiment pertaining to the projection of US interest rates (below), skews risk toward a rise in interest rates as we discussed in the lead article. CIO is holding steady with the base case in 10-year yields around 1.8%, with a range of 1.6–2.2% throughout the majority of the year. When will US economic fundamentals reclaim the spotlight? The first-quarter GDP for 2020 was never projected to be a high number. The impact from tariffs last year was an-ticipated to potentially spill over to the current quarter. With the signing of the Phase 1 US-China trade deal, however, market participants appeared willing to look past the first-quarter weakness as "history" as tariff esca-lation was off the table and a brighter outlook was ex-pected. Now the market is faced with the unknown from the coronavirus. Instead of reacting to the recent strength in

ISM and PMI indicators, the market is dismissive, writing off these economic readings as past tense and viewing the uptick in manufacturing as temporary given the potential negative growth impact of the virus. Is this a wash? We don’t believe so given the large market reaction and the "dovish" outlook that is currently priced in. It may not be in the first quarter, but the risk remains for a rise in interest rates. The US equity market has re-couped much of its losses witnessed in the last week of January. US Treasury yields have barely retraced higher from their mid-month level of 1.95%. If the impact of the virus proves transitory, without a large impact on growth, expect a quick reversal in sentiment and 10-year yields heading back to 2%. TIPS We are comforted by the recent stability in the breakeveninflation rates within the TIPS market. Two performancevariables—a risk-off sentiment and declining oil prices—should have dragged down TIPS performance. Instead, thebreakeven inflation rate remained range-bound, supportingour view that inflation expectations since August weresimply too low. Real yields in 5-year TIPS have moved totheir most negative level since 2017, at –0.27%. For inves-tors who acted in line with our recommendation of buyingthe 5-year area of the TIPS curve, we continue to recom-mend this allocation and forecast inflation expectations torise during the course of the year. For investors who havenot yet allocated, adding at such large negative yield levelsis not a prudent strategy. Wait for a better entry point.



Mortgage-backed securities

The current coupon MBS has remains cheap to AA IG corpo-rates

MBS/AA IG spread, in bps (lhs); Current coupon MBS/AA IG spread ratio (rhs)

Source: Factset, Bloomberg, UBS as of 6 February 2020

Lower coupons have the greatest risk of extension and contraction

Convexity, in %

Source: Citivelocity, UBS as of 6 February 2020

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

50

100

150

200

250

300

350

400

450

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

MBS CC spread to curve AA IG Corporate spread

MBS CC/AA IG Spread ratio Avg ratio

-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.0

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19 Aug-19

Sep-19

Oct-19

Nov-19

Dec-19

Jan-20

FN 3% FN3.5% FN 4% FN 4.5% FN 5%

After a strong start to the year and billions of fund inflows, agency MBS retraced its tightening to the 5- to 10-year Treasury as heightened fears from the coronavirus pushed volatility higher and Treasury yields lower. This, combined with a flattening yield curve, pushed current coupon MBS spreads to 97bps. Although spreads have retraced from their wide and now sit around 90bps, the fact that Treasury yields are not retracing higher akin to their equity counterparts has market sentiment remaining a bit worried. Either interest rates may continue to decline through the 1.43% low of 2019—or possibly to the 1.33% low in 10-year yield witnessed in 2016—as economic growth is slower than anticipated, forcing an equity correction, or the US Treasury market is simply lagging on the upside in rates given the stronger equity and ISM numbers, which would result in a sharp correction higher. For an MBS holder, that means the potential to contract in dura-tion due to lower interest rates and a spiking refi index remains a concern. So does the potential increase in duration, as US Treasury yields have the potential to retrace quickly back to 1.95%, mimicking the recent momentum in US equities. No one likes rising interest rate risk as yields move higher! For CIO, our outlook for agency MBS for 2020 is positive. Of course there will be fits and starts as with all other fixed income spread product, but our view is that the consumer and house-hold balance sheets are solid. Combining this with our outlook of range-bound interest rates of 1.6–2.2%, MBS overall repre-sents good carry, credit quality, and liquidity at a time when the credit cycle continues to mature, but also with the rising volatili-ty in 2020.

CIO’s preferred coupon has been FNMA 4.5% given that it is well "in the money," i.e., consumers who have taken out a mortgage around 5.25% have had the ability to refinance for quite some time. We prefer this sector due to its carry and our view that the curve will re-steepen going forward. As shown, it is the lower coupons, i.e. 3% and 3.5%, that are the most vul-nerable to large movements in the Treasury yields as witnessed by their larger negative convexity. When a coupon represents a large population of mortgage holders that are moving, from an incentive not to refinance to it being economically beneficial to refinance their mortgage, this is when the largest performance vulnerability exists. Moving from "out of the money" to "at the money" increases the negative convexity. When a coupon such as 4.5% moves from "at the money" to well "in the money," the negative convexity declines for those holders who would have refinanced already, or for some reason—possibly an individual's credit—cannot refinance. Therefore, remain in MBS, and for single security buyers we pre-fer 4.5%. Another move forward in SOFR On 5 February, the Alternative Reference Rate Committee (ARRC) announced that the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will stop accepting adjusta-ble-rate mortgages (ARMs) based on LIBOR by the end of 2020, and that both FN and FH plan to begin accepting ARMs based off the Secured Overnight Financing Rate (SOFR) later in 2020. Please contact your financial advisor for the UBS website detail-ing the progress on this transition.



Investment grade bonds

IG spread levels and January moves by sector

OAS change in January, in bps (vertical); OAS level, in bps (horizontal)

Source: ICE BofA, as of 31 January 2020. Shows the top 10 sectors by market value.

US banks and non-financials trade at similar spreads

Spread, in bps


0

5

10

15

20

25

50 70 90 110 130 150 170 190

Energy

Basic Industries

Telecom

Insurance

UtilitiesConsumer

Capital Goods

Banking

Tech

Healthcare IG Index

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020IG 1-10yr US Banks IG 1-10yr Non-financials

IG bonds had strong total returns of 2.4% in January, but this came exclusively from the decline in Treasury yields. IG spreads moved 8bps wider on the month, with energy being the clear underperformer. Due to the risk-off sentiment, the yield to maturity (YTM) for the ICE BofA ML Index has col-lapsed to 2.6%, matching the all-time historical low touched in 2013. The duration of the index sits at an all-time high of 7.8 years. This means that IG returns will continue to be highly correlated to the direction of Treasury rates. Earnings pickup still on track Crucial to maintaining tight spread levels is that the funda-mental underpinnings within IG remain sound. The 4Q19 earnings season has witnessed top-line growth in the low-single-digit range for public IG companies that have reported thus far. Also important is that deleveraging progress has been maintained for those BBB rated issuers that are repair-ing their balance sheets following major acquisitions. Any tilt in strategy toward shareholder rewards is generally being done within the context of maintaining a stable balance sheet. For example, the largest corporate bond issuer, AT&T, has made progress on debt reduction, which has allowed it again to implement buybacks. Within the BBB rated mid-stream energy sector, EBITDA growth and financial discipline has prevailed despite spread levels that rank among the wid-est among all the IG industries. US bank credit: fair valuation but low event risk We have maintained a preference for financial US bank credit over non-financials for several years now. This initially was based on the compression potential that US banks offered

relative to non-financials, which played out in earnest during the 2012–14 timeframe. With their spreads now trading without much differential, our current positive disposition toward financials is based on their strong regulatory scrutiny and low event risk vis-à-vis their industrial counterparts. It also stems from the yield pickup that is obtainable in the subordinated bonds and preferred securities of bank issues. For the large US banks, the quality of loan portfolios remains resilient, and although some segments such as CLO exposure have generated attention, we don’t believe this represents an excessive build-up of risk that could impair institutions. We also continue to see a positive credit rating trajectory for the Big 6 US universal banks. Bank of America and Citigroup received credit rating upgrades from Moody's last year, and Morgan Stanley was recently assigned a positive outlook by the same rating agency. Drivers of the enhanced Moody’s outlook were cited as strong operating performance and an improving profitability mix driven by the stability of wealth management activities and competitive strengths in global capital markets. Moody’s also noted that MS has a strong capital position. For our non-financial credit recommendations, we advocate a selective stance. Within BBBs, we favor companies with clear deleveraging targets. This includes issuers with more defen-sive financial policies after a large acquisition, including levers such as share buyback suspension and asset-disposal plans. Across the maturity spectrum, IG bonds with short 1–3 year maturities provide attractive risk-adjusted yields.



High yield corporate bonds

BB spread tightness is driving differentiated perfor-mance

Daily spread levels, in bps

Source: ICE BofA, UBS as of 3 February 2020

2019 fund flows show investor migration away from leveraged loans

Rolling year-to-date totals, in USD mn


0

200

400

600

800

1,000

1,200

1,400

1,600

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

BB Excess Spread vs BBB CCC Excess Spread vs BB

(30,000)

(20,000)

(10,000)

0

10,000

20,000

Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19

High Yield Leveraged Loan

In 2020, the US high yield (HY) market has produced a 0.1% return. Despite notable strength in the first half of January—as spreads over Treasuries compressed, continuing the posi-tive trend from December—the onset of the coronavirus has weighed on select sectors and created a headwind for the performance of risk assets. Segments tied to travel experi-enced weakness, contributing to modest spread widening and partially retracing year-to-date gains. This furthered the weakness in oil prices, which has been a drag on the perfor-mance of credit from the energy sector. BB – what's the latest? BB credit has been a recurring HY topic as it has outper-formed other tiers, despite its being a relative safe haven from default risk. BB returned 15.7% in 2019, compared to 14.3% and 9.6% for B and CCC, respectively. To illustrate the current positioning of BB credit, we believe it is insightful to point to the excess spread versus BBB credit and the dis-count to CCC spreads. The chart below shows that, as of mid-January, BB spreads effectively matched the tightest premium over BBB spreads on record. Simultaneously, the spread discount relative to CCC credit widened, but not due to a blowout in CCC spreads. The tightness in the BB market demonstrates the differentiated interest from buyers com-pared to other tiers of HY, but also highlights its lofty valua-tion. It is also worth noting the reduced duration in BB credit, which is approaching three years. While this is partly driven by trading levels, it is also due to a shift in the mix of constit-

uents. BB credit used to comprise a significant component of non-call life securities, similar to the structure of the invest-ment grade market. Borrowers would accept the lack of flex-ibility in early redemption in exchange for a reduced coupon. In recent years, call protection in the HY market has shifted to shorter call dates with reduced call premiums. This shift, combined with the efficient cost of capital, has attracted more borrowers, and the market currently permits borrowers to redeem an issue in year three at 50% of coupon. The in-creased callability of bonds in HY reduces the potential for trading upside, and this has become a growing segment within BB. We do not expect all issues trading to their first call date to be redeemed at the first opportunity, but the possibility limits the potential for trading gains in BB credit to enhance returns beyond coupon income. Leveraged loans – will the inflows persist? January experienced USD 106mn of net flows into leveraged loan funds. This marks a notable shift from 2019's total out-flows of USD 29bn. While leveraged loans benefited early in the month from renewed strength in risk assets, this strength seems temporary as beginning-of-month inflows were largely undone by end-of-month outflows. Demand for leveraged loans is highly correlated to expectations for interest rates, and rising rates trigger a migration to a floating-rate asset class. We do not believe that market concern over rising rates is sufficient to sustain inflows in 1Q20. However, we note that reduced inflow activity will hopefully reduce repricing activity and preserve income levels for investors.



Preferred securities Preferred coupons continue to drop…

Mkt-weighted coupon, in %

Source: Bloomberg, ICE BofA, UBS as of 31 January 2020

…led by historically low market yields

Yields, in %

Source: Bloomberg, ICE BofA, UBS as of 31 January 2020

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

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11

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13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

1.4

1.9

2.4

2.9

3.4

3.9

4.4

4.9

5.4

5.9

6.4

Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20

US Treasury Preferreds

Lower coupons mean more extension risk In recent months, many vintage collectibles in the preferred space have vanished. With interest rates and yields near his-toric lows, the multi-year decline in preferred coupons con-tinues so far in 2020. It's a seller's market, and issuers con-tinue to refinance vintage preferreds with lower-coupon re-placements. In August, Goldman Sachs finally called its 6.2% GS pr B; originally issued in 31 October 2005, it had been callable for nearly nine years. Goldman issued a 4.95% fixed-rate reset preferred in November, and another with an initial 4% coupon a few weeks ago. Even coupons that would have been considered low not that long ago were refinanced in recent months, including the 5.625% ALL pr A. It became callable in July 2018 but was redeemed last month. This followed the redemption of three other Allstate preferreds, all with coupons above 6%, in Oc-tober. Allstate issued a 5.1% coupon in August and a 4.75% in November. Similarly, 5.45% JPM pr A first became callable in March 2018, and was finally taken out in December. JPMorgan had issued a 4.75% preferred two months prior. The continued decline in coupons is raising the sector's over-all sensitivity to rising yields. As coupons decline, so does the likelihood that an issuer will call and refinance securities. An issuer is less likely to call and refinance a lower coupon in the future. Call probability falls further as yields rise, since overall refinancing costs (i.e., market coupons) naturally rise as well. As the uncertainty of potential repayment timing increases

and extends beyond the first call date, preferreds begin to trade as "longer duration" vehicles. This is called "extension risk," reflecting the possibility that as yields rise—whether due to higher interest rates or credit spreads—sensitivity to those rising yields actually increases. These risks are elevated for lower-coupon preferreds since these are inherently less likely to be refinanced. The old adage "here today, gone tomorrow" may apply to the old vintage coupons in the upper 5% area and higher. But while nothing lasts forever, markets change as well. With the 10-year Treasury yield stuck below 2% and yield premi-ums at historic lows, today's market clearing yield of less than 4% provides ample accommodation for new preferreds with historically low coupons. However, if market yields rise due to either higher risk-free Treasury rates or more moder-ate premiums that climb closer to historic averages, perpetual preferreds with low fixed coupons may not trade well, espe-cially if they are fixed-for-life. The latest round of refinancing activity may make more seasoned issues with higher coupons appear more attractive with potentially lower extension risk and less relative sensitivity to yield volatility.



Taxable municipal bonds

Taxable municipal issuance trends, 2009-2020 YTD

Issuance in USD millions (lhs); taxable issance as a % of total muni issu-ance (rhs)

Note: Taxable Build America Bonds were issued in 2009 and 2010 Source: Bond Buyer, UBS as of 22 January 2020

10-year default rates of munis vs. global corporates

In %

Source: Moody's, US Municipal Bond Defaults and Recoveries, 1970-2018, 31 July 2019, UBS as of 31 January 2020

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

100,000

200,000

300,000

400,000

500,000

600,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD

Taxable Municipal Bonds Total Municipal Bonds Taxable Municipals as Percent of Total

0.0

0.02

0.11

1.13

0.10

0.37

0.78

2.10

3.70

2.28

Aaa

Aa

A

Baa

Investment Grade

Global Corporate Municipal

Taxable munis off to a strong start In these early weeks of a new decade, the taxable municipal bond market is off to a strong start. As a point of reference, this fixed income muni sector has posted a 3.6% return on a month-to-date basis through 30 January. By comparison, an index of US Treasury securities (+2.3%) as well as investment grade corporate debt (+2.2%) registered softer results over the same time frame. We attribute this outperformance from taxable munis in large part to their longer duration (9.4 years) compared to their fixed income counterparts. By comparison, the effective duration on an index of US Treasury securities, and corporate debt, now sit at 6.7 years and 7.8 years, respectively, as ex-amples. Taxable muni issuance on the rise Since August 2019, the pace of new taxable municipal bond sales has moved notably higher. As a point of reference, tax-able munis accounted for about 17% of the total primary market last year, up from an average of only 9% from 2011 through 2018. And, thus far in 2020, the market share of taxable munis has climbed even higher to reach about 23% of total muni issuance. This is the largest market composition of taxable munis seen since the Build America Bonds (BABs) program's existence in 2009 and 2010 (see chart). As long as taxable yields remain low and tax-exempt advance refundings remain restricted, issuers are likely to continue to take advantage of refinancing opportunities through the

taxable muni market in the months ahead (see our Education note, Understanding bonds: An overview of taxable municipal bonds, 7 January 2020). Investor demand Taxable municipal bonds have become popular among institu-tional investors. By and large, the bonds have longer durations and lower default rates than corporate debt, which make them a useful substitute for crossover investors with longer time horizons. The 10-year cumulative default rate of invest-ment grade municipal securities (0.1%) is markedly lower than the rate for global corporate bonds (2.32%) with comparable credit ratings (see chart). Deal recap Since our last monthly update, the State of Wisconsin (Aa2/--/AA) was in the market with a USD 623.3bn general fund an-nual appropriation taxable revenue bond deal. The loan in-cluded bonds with maturity dates ranging from one year through 12 years. The bonds due in 10 years were offered at a 2.39% coupon rate at par, representing a 75bps spread over the relevant US Treasury benchmark. The longest-dated bonds, which have a maturity date in 12 years, were offered at a 2.49% coupon rate at par, representing an 85bps spread over the Treasury benchmark. Also, all of the bonds were non-callable, providing an important benefit to investors seeking protection from early call risk within their fixed income portfo-lios.



Credit chartbook and key metrics

Fig A1: Investment grade financial and non-financial credit recommendations

Source: Bloomberg, UBS as of 3 February 2020

Issuer CUSIP Ticker Coupon Maturity Issue Date YTW %Spread

bpsDuration yrs Price S&P Amt Out Sector

1-3 year (short-end)

AT&T INC 00206RBN1 T 2.625 12/1/2022 12/11/2012 1.95 58 2.49 101.9 BBB 1,119 Communications

CITIGROUP INC 172967LQ2 C 2.700 10/27/2022 10/27/2017 1.88 56 2.55 102.2 BBB+ 1,750 US banks

CVS HEALTH CORP 126650CK4 CVS 3.500 7/20/2022 7/20/2015 2.02 61 2.22 103.5 BBB 1,500 Consumer, Non-cyclical

ENERGY TRANSFER OPERATNG 29273RAQ2 ETP 5.200 2/1/2022 1/17/2012 2.46 75 1.68 105.3 BBB- 1,000 Energy

FORD MOTOR CREDIT CO LLC 345397ZH9 F 3.813 10/12/2021 8/9/2018 2.66 131 1.63 101.9 BBB- 1,150 Consumer, Cyclical

GOLDMAN SACHS GROUP INC 38145GAG5 GS 2.350 11/15/2021 9/27/2016 1.91 -11 0.77 100.8 BBB+ 2,250 US banks

KINDER MORGAN ENER PART 28370TAE9 KMI 5.000 10/1/2021 9/20/2011 2.36 54 1.35 104.3 BBB 500 Energy

VERIZON COMMUNICATIONS 92343VBJ2 VZ 2.450 11/1/2022 11/7/2012 1.75 38 2.42 101.9 BBB+ 929 Communications

Intermediate maturitiesAPPLE INC 037833DF4 AAPL 2.750 1/13/2025 11/13/2017 1.76 42 4.50 104.6 AA+ 1,500 TechnologyALTRIA GROUP INC 02209SAS2 MO 4.000 1/31/2024 10/31/2013 2.10 79 3.73 107.2 BBB 1,400 Consumer, Non-cyclical

AT&T INC 00206RDC3 T 4.450 4/1/2024 3/17/2016 2.07 63 3.59 109.4 BBB 1,208 Communications

BOARDWALK PIPELINES LP 096630AD0 BWP 4.950 12/15/2024 11/26/2014 2.89 148 4.18 109.3 BBB- 600 Energy

BOEING CO 097023BR5 BA 2.250 6/15/2026 5/18/2016 2.28 89 5.94 99.8 A- 400 Industrial

VIACOMCBS INC 124857AP8 VIAC 3.500 1/15/2025 1/12/2015 2.16 78 4.37 106.3 BBB 600 Communications

COMCAST CORP 20030NBX8 CMCSA 3.000 2/1/2024 1/10/2017 1.74 41 3.72 104.8 A- 1,250 Communications

CVS HEALTH CORP 126650CC2 CVS 4.000 12/5/2023 12/5/2013 2.09 67 3.36 107.0 BBB 1,250 Consumer, Non-cyclical

DOW CHEMICAL CO/THE 260543CJ0 DOW 3.500 10/1/2024 9/16/2014 2.01 63 4.09 106.6 BBB 900 Basic Materials

DUKE ENERGY CORP 26441CAW5 DUK 2.400 8/15/2022 8/10/2017 1.86 54 2.36 101.3 BBB+ 500 Utilities

EBAY INC 278642AL7 EBAY 3.450 8/1/2024 7/28/2014 2.13 75 3.99 105.6 BBB+ 750 Communications

EXELON CORP 30161NAU5 EXC 3.400 4/15/2026 4/7/2016 2.22 81 5.40 106.8 BBB 750 Utilities

FORD MOTOR CREDIT CO LLC 345397WW9 F 3.664 9/8/2024 9/8/2014 3.31 200 4.21 101.5 BBB- 750 Consumer, Cyclical

GENERAL ELECTRIC CO 369604BG7 GE 3.375 3/11/2024 3/11/2014 2.04 74 3.82 105.2 BBB+ 750 Industrial

GENERAL MOTORS FINL CO 37045XCD6 GM 3.500 11/7/2024 11/7/2017 2.58 124 4.25 104.1 BBB 750 Consumer, Cyclical

HOME DEPOT INC 437076BC5 HD 3.750 2/15/2024 9/10/2013 1.66 23 3.51 108.1 A 1,100 Consumer, Cyclical

KINDER MORGAN ENER PART 494550BS4 KMI 4.150 2/1/2024 8/5/2013 2.21 79 3.51 107.4 BBB 650 Energy

MCDONALD'S CORP 58013MFE9 MCD 3.350 4/1/2023 3/16/2018 1.78 44 2.92 104.8 BBB+ 1,000 Consumer, Cyclical

MICROSOFT CORP 594918BB9 MSFT 2.700 2/12/2025 2/12/2015 1.70 34 4.46 104.8 AAA 2,250 Technology

MONDELEZ INTERNATIONAL 609207AB1 MDLZ 4.000 2/1/2024 1/16/2014 1.92 50 3.52 107.9 BBB 696 Consumer, Non-cyclical

MPLX LP 55336VAG5 MPLX 4.875 12/1/2024 9/27/2016 2.61 119 4.14 110.2 BBB 1,149 Energy

ORACLE CORP 68389XBS3 ORCL 2.950 11/15/2024 11/9/2017 1.79 44 4.33 105.3 A+ 2,000 Technology

PEPSICO INC 713448CT3 PEP 2.750 4/30/2025 4/30/2015 1.72 36 4.67 105.1 A+ 1,000 Consumer, Non-cyclical

PHILIP MORRIS INTL INC 718172BM0 PM 3.250 11/10/2024 11/10/2014 2.00 69 4.43 105.7 A 750 Consumer, Non-cyclical

PLAINS ALL AMER PIPELINE 72650RBF8 PAA 3.600 11/1/2024 9/9/2014 2.61 125 4.16 104.4 BBB- 750 Energy

SOUTHERN CO 842587CU9 SO 2.950 7/1/2023 5/24/2016 1.90 55 3.11 103.4 BBB+ 1,250 Utilities

VERIZON COMMUNICATIONS 92343VCR3 VZ 3.500 11/1/2024 10/29/2014 2.06 68 4.17 106.5 BBB+ 1,742 Communications

WESTERN MIDSTREAM OPERAT 958254AB0 WES 4.000 7/1/2022 6/28/2012 2.68 122 2.08 103.1 BBB- 670 Energy

Financial issues

Issuer CUSIP Ticker Coupon Maturity Issue Date YTW %Spread

bpsDuration

yrsPrice S&P Amt Out Sector

Senior Notes

BANK OF AMERICA CORP 06051GFS3 BAC 3.875 8/1/2025 7/30/2015 1.95 61 5.02 110.0 A- 1,793 US banks

CITIGROUP INC 172967JP7 C 3.300 4/27/2025 4/27/2015 2.01 69 4.82 106.4 BBB+ 1,500 US banks

GOLDMAN SACHS GROUP INC 38148LAE6 GS 3.750 5/22/2025 5/22/2015 2.23 85 4.63 107.5 BBB+ 2,250 US banks

JPMORGAN CHASE & CO 46625HMN7 JPM 3.900 7/15/2025 7/21/2015 2.01 61 4.77 109.7 A- 2,500 US banks

MORGAN STANLEY 6174468C6 MS 4.000 7/23/2025 7/23/2015 1.96 62 4.99 110.5 BBB+ 3,000 US banks

WELLS FARGO & COMPANY 94974BGP9 WFC 3.550 9/29/2025 9/28/2015 2.05 71 5.13 107.9 A- 2,500 US banks

Subordinated Notes

BANK OF AMERICA CORP 06051GFP9 BAC 3.950 4/21/2025 4/21/2015 2.23 90 4.73 108.4 BBB+ 2,500 US banks

CITIGROUP INC 172967HB0 C 5.500 9/13/2025 9/13/2013 2.34 99 4.87 116.5 BBB 1,420 US banks

GOLDMAN SACHS GROUP INC 38141GVR2 GS 4.250 10/21/2025 10/21/2015 2.27 92 5.11 110.6 BBB- 2,000 US banks

JPMORGAN CHASE & CO 46625HJY7 JPM 3.875 9/10/2024 9/10/2014 2.03 73 4.21 108.0 BBB+ 3,000 US banks

MORGAN STANLEY 6174467X1 MS 5.000 11/24/2025 11/22/2013 2.33 97 5.12 114.4 BBB 2,000 US banks

US BANCORP 91159HHM5 USB 3.100 4/27/2026 4/26/2016 2.03 64 5.62 106.2 A- 1,000 US banks

WELLS FARGO & COMPANY 94974BFY1 WFC 4.100 6/3/2026 6/3/2014 2.34 96 5.64 110.3 BBB+ 2,437 US banks



Fig A2: Select preferred securities

Source: UBS, Bloomberg, as of 5 February 2020 1YTW = "yield to worst" is the lowest estimated yield among possible redemption date scenarios.

2YTM calculation for F2Fs uses assumed LIBOR rates based on the forward curve through Bloomberg analytics.

3Duration is calculated using Bloomberg analytics

* NRA-eligible, pays fully-taxable interest income

** Not NRA eligible, pays fully taxable REIT dividend + Not NRA eligible, pays qualifed dividend income

Security Name Symbol/ Last Next YTW YTM / CY YTC Eff

CUSIP Price Call Date (%)1 (%)2 (%) Dur3

Attractive f ixed-to-float preferreds +

172967MG3 $105.00 9/12/2024 3.80% 5.00% 3.80% 4.3

172967KM2 $114.40 8/15/2026 3.70% 5.50% 3.70% 5.5

38148BAC2 $109.50 11/10/2026 3.60% 5.00% 3.60% 5.9

Attractive $25 par f ixed-rate coupon WFC X $26.10 9/15/2021 3.10% 5.30% 3.10% 3.0BHFAL $27.20 9/15/2023 3.80% 5.70% 3.80% 6.5BHFAP $28.00 3/25/2024 3.60% 5.90% 3.60% 5.3

Citigroup 5.00% fixed to call date; then SOFR+381.3bps

Goldman Sachs Group, Inc. 5.30% fixed to call date; thereafter 3mo LIBOR+383.4bps

Brighthouse Financial Inc 6.60% perpetual+Brighthouse Financial Inc 6.25% 9/15/2058*

Citigroup 6.25% fixed to call date; thereafter 3mo LIBOR+451.7bps

Wells Fargo & Co. 5.50% perpetual +



Mortgage securitized product metrics

Fig A3: Spreads for various securitized products (2019 YTD min/max)

Non agency spreads Current level YTD min YTD max

Legacy spreads Jumbo fixed 110 100 110 Alt A floater 120 120 120 Option ARM 120 110 120 Current pay subprime 85 85 90 LCF subprime 130 130 135 New issue spreads

Jumbo 2.0 88 88 105 NPL A1 155 155 168 NPL A2 315 315 330

CMBS spreads Current level YTD min YTD max

New issue on the run spreads

3yr AAA 42 40 42 5yr AAA 62 60 63 7yr AAA 70 68 73 10yr AAA 78 75 80 AA 125 125 140 A 165 165 175 BBB- 270 270 280

CLO spreads Current level YTD min YTD max

CLO 2.0

AAA 103 103 113 AA 165 165 180 A 210 210 255 BBB 315 310 350 BB 680 675 705

B 1100 1100 1200

Source: ICE BofAML, UBS, as of 20 January 2020

Fig A4: Year to date total return

Non agency Duration 2019

Prime fixed 3-5yr 1.2

Alt-A ARM 0-1yr 1.0

Option ARM 0-1yr 0.9

Subprime ARM 0-1yr 1.0

CMBS 4.8 2.4

AAA 5.1 2.3

AA-BBB 5.0 2.6

BBB 5.0 2.7

Agency 5.1 2.5

ABS fixed 1.9 1.0

Auto 1.4 0.8

Cards 2.0 0.8

HEL 3.2 1.6

MH 3.0 0.8

ABS floating 0.1 0.5

Cards 0.1 0.3

HEL 0.1 0.6

Student loans 0.1 0.7

Source: ICE BofAML, UBS, as of 30 January 2020




Fig. A5: IG Financials versus IG Industrials spreads Spreads in basis points

Fig. A6: IG Corporate and Treasury yields Yield to maturity (in %)

Source: ICE BofAML, UBS CIO WMR as of 4 February 2020 Source: Bloomberg, ICE BofAML, UBS WMR as of 4 February 2020

Fig A7: IG corporate total return by maturity

In %

Maturity YTD 3-month 6-month 12-month

1-3 yrs 0.48 1.00 1.99 5.24

3-5 yrs 1.06 1.74 3.02 8.87

5-7 yrs 1.64 2.39 4.05 12.29

7-10 yrs 2.02 2.95 4.79 15.33

10+ yrs 3.35 4.98 7.70 24.00

Source: ICE BofAML, UBS CIO WMR as of 4 February 2020

Fig A8: IG corporate yield table by sector and rating

Fixed income yield table (in %)

Sector AAA AA A BBB

All corporates 2.35 2.23 2.44 3.00

Industrials 2.38 2.27 2.43 3.04

Utilities N/A N/A 2.84 N/A

Financials 1.94 2.08 2.33 2.80

Source: ICE BofAML, UBS CIO WMR as of 4 February 2020

Fig. A9: IG versus HY corporate bond spreads Spreads in basis points

Fig. A10: A-rated & BBB-rated spreads and spread ratios Spreads in basis points (lhs), Ratio in % (rhs)

Source: ICE BofAML, UBS CIO WMR as of 4 February 2020 Source: ICE BofAML, UBS CIO WMR as of 4 February 2020

0

150

300

450

600

750

900

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

IG Financials Industrials

0

2

4

6

8

10

2008 2010 2012 2014 2016 2018 2020

10 Year Treasury IG Bonds

0

450

900

1350

1800

2250

2008 2010 2012 2014 2016 2018 2020IG HY IG 10-yr avg. HY 10-yr avg.

0.75

1.00

1.25

1.50

1.75

2.00

0100200300400500600700800900

2008 2010 2012 2014 2016 2018 2020

A Corps BBB Corps BBB/A spread ratio




Fig. A12: Individual sector spread changes over the past year

Source: ICE BofAML, UBS, as of 3 February 2020

Fig. A13: IG corporate sector spreads vs. duration

Bubble size is indicative of market value weighting within the IG Master

Source: ICE BofAML, UBS, as of 3 February 020

50

75

100

125

150

175

200

1 year average CurrentThe vertical line represents the range of spread from over the past year. The diamond marker shows the current spread, while the square marker shows the average spread over the time period.

45

55

65

75

85

95

105

115

125

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145

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4 5 6 7 8 9 10 11 12

Op

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Sp

read

Effective Duration

Utilities

Banking

Financial Services Real Estate

Technology & Electronics

Healthcare

Insurance

Basic Industry

Capital Goods

Energy

MediaRetail

Telecom

Services

Consumer cyclical



Liquidity chartbook and key metrics

Fig. B1: Bond market supply projections for 2020

Historical and projected gross supply (in USD bn)

Fig. B2: Bond market funding stress (above zero greater, below zero less)

Source: JPM, UBS CIO WMR, as of 11 January 2020 Source: ICE BofAML, UBS CIO WMR, as of 31 January 2020

Fig. B3: Trading volume – Mortgages Trading volume (in USD bn)

Fig. B4: Trading volume – Securitized products Trading volume (in USD bn)

Source: SIFMA, UBS CIO WMR, as of 4 February 2020 Source: SIFMA, UBS CIO WMR, as of 4 February 2020

Fig. B5: Trading volume – Corporates Trading volume (in USD bn)

Fig. B6: Industrial corporate and BABs spreads Option adjusted spreads (in bps)

Source: SIFMA, UBS CIO WMR, as of 4 February 2020 Source: ICE BofAML, UBS CIO WMR, as of 4 February 2020

(200)

0

200

400

600

800

1,000

Muni Trsy MBS IG Corps HY TIPS CMBS-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

BAML GFSI Liquidity Risk

0

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300

400

0

5

10

15

20

25

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Spec pools (left axis) Agency CMO (left axis)

Agency TBA (right axis)

0.0

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Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

ABS CMBS IO/PO

0

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35


Invt grade High yield Corporates

80

110

140

170

200

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260

290

320

Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20

CI09 U.S Industrial Corp 10+yr OAS

BABS Build America Bond Index OAS



Rates chartbook and key metrics

Fig. C1: Treasury rates and economic surprises Treasury yield to maturity, in %

Fig. C2: BABs versus taxable munis spreads Option adjusted spread, in bps

Source: Bloomberg, UBS CIO WMR, as of 4 February 2020 Source: ICE BofAML, UBS CIO WMR, 4 February 2020

Fig. C3: Treasury yield curves Yield curves, in basis points

Fig. C4: Treasury yield curves Yield curves, in basis points

Source: Bloomberg, UBS CIO WMR, as of 5 February 2020 Source: Bloomberg, UBS CIO WMR, as of 5 February 2020

Fig. C5: TIPS nominal rates Interest rates, in %

Fig. C6: TIPS forward rates Forward rates, in %


140

170

200

230

1.2

1.8

2.4

3.0

3.6


10yr (left axis) UBS Economic Surprise Index (right axis)

75

100

125

150

175

200

Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

Taxable Munis BABs

(50)

0

50

100

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200


2yr/5yr 5yr/10yr 10yr/30yr

2yr/5yr Avg 5yr/10yr Avg 10yr/30yr Avg

(100)

0

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500


2yr/10yr 2yr/30yr 5yr/30yr

2yr/10yr Avg 2yr/30yr Avg 5yr/30yr Avg

0

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5


2yr Tsy Yield 5-year yield

10-Year Yield 30-yr yield

(2)

0

2

4

6


5yr BE Fwd Fed Projection 5y5y forward infl.

5Y5Y forward rate



Rates chartbook and key metrics

Fig. C7: TIPS breakeven rates Breakeven rates, in %

Fig. C8: TIPS real rates Real rates, in %


MBS chartbook and key metrics Fig. D1: Mortgage Basis is rich but maintain a neutral weighting Spreads, in basis points

Fig. D2: Structured product yields Yield to worst, in %

Source: Bloomberg, CDX, UBS CIO WMR, as of 6 February 2020 Source: ICE BofAML, Yieldbook, UBS CIO WMR, as of 6 February 2020

Fig. D3: Structured product option adjusted spreads OAS, in %

Fig. D4: Mortgage basis versus Treasury rates Mortgage spread, in basis points

Source: ICE BofAML, Yieldbook, UBS CIO WMR, as of 6 February 2020 Source: Bloomberg, UBS CIO WMR, as of 6 February 2020

0.0

0.5

1.0

1.5

2.0

2.5

3.0


2yr BEI 5yr BEI 10-Year BEI 30yr BEI

(4)

(2)

0

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4


2yr Real Rate 5yr Real Yield

10-Year Real Rate 30-year real rate

0

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2

3

4

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6

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50

100

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200


IG CDX CC vs 10yr 10yr yield

Agencys

CMBS

ABS cardsABS auto

MBS fixed rateMBS hybrid arm

30yr gnma pt30yr conv pt

15yr gnma pt

15yr conv pt

2yr CMO

5yr CMO

1.5

1.7

1.9

2.1

2.3

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2.7

1 2 3 4 5 6Effective duration (years)

Treasurys

Agencys

CMBS

ABS cards

ABS auto

MBS fixed rate

MBS hybrid arm

30yr gnma pt 30yr conv pt

15yr gnma pt15yr conv pt

-0.2

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0

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Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

Current coupon 30yr vs Treasury 5yr/10yr Current coupon 30yr vs Treasury 10yr



Detailed asset allocation

Investor risk profile Conservative Moderate Aggressive

All figures in %

Stra

tegi

c as

set a

lloca

tion

WM

R ta

ctica

l dev

iatio

n

Curre

nt a

lloca

tion1

Stra

tegi

c as

set a

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tion

WM

R ta

ctica

l dev

iatio

n

Curre

nt a

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tion1

Stra

tegi

c as

set a

lloca

tion

WM

R ta

ctica

l dev

iatio

n

Curre

nt a

lloca

tion1

Treasuries 33.0 -0.5 32.5 18.0 -2.0 16.0 17.0 -11.5 5.5

Short 18.0 -0.5 17.5 9.0 -2.0 7.0 0.0 0.0 0.0

Intermediate 7.5 0.0 7.5 4.0 0.5 4.5 0.0 0.0 0.0

Long 7.5 0.0 7.5 4.0 0.0 4.0 17.0 -11.5 5.5

TIPS 9.5 0.0 9.5 8.5 2.0 10.5 4.0 0.0 4.0

Short 3.5 -0.5 3.0 3.0 0.0 3.0 1.5 -1.0 0.5

Intermediate 4.0 1.0 5.0 3.5 2.0 5.5 1.5 0.5 2.0

Long 2.0 -0.5 1.5 2.0 -1.5 0.5 1.0 0.5 1.5

Agency debt 9.0 0.0 9.0 8.5 -1.5 6.0 0.0 0.0 0.0

Short 6.5 0.0 6.5 6.0 -2.0 4.0 0.0 0.0 0.0

Intermediate 1.5 0.0 1.5 1.5 0.5 2.0 0.0 0.0 0.0

Long 1.0 0.0 1.0 1.0 -0.5 0.0 0.0 0.0 0.0

Mortgage backed securities 18.5 0.0 18.5 22.5 0.0 22.5 12.0 0.0 12.0

Short 8.0 0.0 8.0 10.0 0.0 10.0 5.0 -2.0 3.0

Intermediate 8.5 0.0 8.5 10.0 2.5 12.5 5.5 1.0 6.5

Long 2.0 0.0 2.0 2.5 -2.5 0.0 1.5 1.0 2.5

MBS/Securitized products 8.0 1.0 9.0 10.0 0.0 10.0 13.0 -1.0 12.0

Short 3.5 0.5 4.0 4.5 0.5 5.0 5.5 -2.5 3.0

Intermediate 3.5 0.5 4.0 4.5 0.5 5.0 6.0 3.0 9.0

Long 1.0 0.0 1.0 1.1 -1.0 0.0 1.5 -1.5 0.0

Investment grade corporates 9.5 0.5 10.0 12.5 0.0 12.5 10.5 2.5 13.0

Short 3.5 0.5 4.0 4.5 1.5 6.0 3.5 0.5 4.0

Intermediate 3.0 0.0 3.0 4.0 0.0 4.0 3.5 1.0 4.5

Long 3.0 0.0 3.0 4.0 -1.5 2.5 3.5 1.0 4.5

High yield corporates 4.0 0.0 4.0 10.5 0.0 10.5 25.0 9.0 34.0

BB-rated 4.0 0.0 4.0 6.0 -1.0 5.0 8.5 -3.0 5.5

B-rated 0.0 0.0 0.0 5.5 -0.5 5.0 16.5 12.0 28.5

Taxable municipals 5.0 -0.5 4.5 3.5 -0.5 3.0 2.5 -1.0 1.5

Preferred securities 2.0 -0.5 1.5 3.0 -1.0 2.0 8.0 -2.0 6.0

Bank loans 1.5 0.0 1.5 3.0 4.0 7.0 8.0 4.0 12.0

1The current allocation column is the sum of the strategic asset allocation and the tactical deviation column. Note: See Appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations. Source: UBS and WMA AAC, 7 February 2020



Appendix

Explanations about asset allocations

Sources of strategic asset allocations and investor risk profiles Strategic asset allocations represent the longer-term allocation of assets that is deemed suitable for a particular inves-tor. The strategic asset allocation models discussed in this publication, and the capital market assumptions used for the strategic asset allocations, are based on those developed and approved by the Wealth Management Americas Asset Allocation Committee (WMA AAC).

The strategic asset allocations are provided for illustrative purposes only and are based on those designed by the WMA AAC for hypothetical US investors with a total return objective under three different Investor Risk Profiles ranging from conservative to aggressive. In general, strategic asset allocations will differ among investors according to their individual circumstances, risk tolerance, return objectives and time horizon. Therefore, the strategic asset allocations in this publi-cation may not be suitable for all investors or investment goals and should not be used as the sole basis of any invest-ment decision. Minimum net worth requirements may apply to allocations to non-traditional assets. As always, please consult your UBS Financial Advisor to see how these weightings should be applied or modified according to your indi-vidual profile and investment goals.

The process by which the strategic asset allocations were derived is described in detail in the publication entitled The tilts of FIS - A primer on fixed income asset allocation, published on 9 April 2015. Your Financial Advisor can provide you with a copy.

Deviations from strategic asset allocation or benchmark allocation The recommended tactical deviations from the strategic asset allocation or benchmark allocation are provided by the Global Investment Committee and the Investment Strategy Group within CIO Wealth Management Research Americas. They reflect the short- to medium-term assessment of market opportunities and risks in the respective market seg-ments. Positive/zero/negative tactical deviations correspond to an overweight / neutral / underweight stance for each respective market segment relative to their strategic allocation. The current allocation is the sum of the strategic asset allocation and the tactical deviation.



Appendix Investment Committee Global Investment Process and Committee Description The UBS investment process is designed to achieve replicable, high quality results through applying intellectual rigor, strong process governance, clear responsibility and a culture of challenge. Based on the analyses and assessments conducted and vetted throughout the investment process, the Chief Investment Officer (CIO) formulates the UBS Wealth Management Investment House View (e.g., overweight, neutral, underweight stance for asset classes and market segments relative to their benchmark allocation) at the Global Investment Commit-tee (GIC). Senior investment professionals from across UBS, complemented by selected external experts, debate and rigorously challenge the investment strategy to ensure consistency and risk control. Global Investment Committee Composition The GIC is comprised of eight members, representing top market and investment expertise from across all divisions of UBS: Mark Haefele (Chair) Jorge Mariscal Mike Ryan Simon Smiles Tan Min Lan Themis Themistocleous Paul Donovan Bruno Marxer (*) Andreas Koester

(*) Business areas distinct from Chief Investment Office/Wealth Management Research WMA Asset Allocation Committee Description We recognize that a globally derived house view is most effective when complemented by local perspective and appli-cation. As such, UBS has formed a Wealth Management Americas Asset Allocation Committee (WMA AAC). WMA AAC is responsible for the development and monitoring of UBS WMA’s strategic asset allocation models and capital market assumptions. The WMA AAC sets parameters for the CIO Wealth Management Research Americas Investment Strategy Group to follow during the translation process of the GIC’s House Views and the incorporation of US-specific asset class views WMR-A into the US-specific tactical asset allocation models. WMA Asset Allocation Committee Composition The WMA Asset Allocation Committee is comprised of nine members: Mike Ryan Michael Crook Jason Draho Leslie Falconio Laura Kane David Lefkowitz Tom McLoughlin Brian Rose Jeremy Zirin

(*) Business areas distinct from Chief Investment Office/Wealth Management Research



Appendix



Appendix

Statement of Risk

Municipal bonds - Although historical default rates are very low, all municipal bonds carry credit risk, with the degree ofrisk largely following the particular bond’s sector. Additionally, all municipal bonds feature valuation, return, and liquidityrisk. Valuation tends to follow internal and external factors, including the level of interest rates, bond ratings, supplyfactors, and media reporting. These can be difficult or impossible to project accurately. Also, most municipal bonds arecallable and/or subject to earlier than expected redemption, which can reduce an investor’s total return. Because of thelarge number of municipal issuers and credit structures, not all bonds can be easily or quickly sold on the open market.Disclaimer of Liability - This may contain information obtained from third parties, including ratings from credit ratingsagencies such as Standard & Poor's. Reproduction and distribution of third party content in any form is prohibited exceptwith the prior written permission of the related third party. Third party content providers do not guarantee the accuracy,completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors oromissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content.THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO,ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENTPROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE,SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME ORPROFITS AND OPPORTUNITY COSTS) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Creditratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities.They do not address the suitability of securities or the suitability of securities for investment purposes, and should notbe relied on as investment advice.

UBS does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware thatthe firm may have a conflict of interest that could affect the objectivity of UBS research reports.

Fixed income - Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology,geopolitical conditions and other important variables. Corporate bonds are subject to a number of risks, including creditrisk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on investment grade corporatebonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. Asinterest rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations,given changes in the level of risk-free interest rates. Not all bonds can be sold quickly or easily on the open market.Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequencesof owning any securities referenced in this report.

Preferred securities - Prospective investors should consult their tax advisors concerning the federal, state, local, andnon-U.S. tax consequences of owning preferred stocks. Preferred stocks are subject to market value fluctuations, givenchanges in the level of interest rates. For example, if interest rates rise, the value of these securities could decline. Ifpreferred stocks are sold prior to maturity, price and yield may vary. Adverse changes in the credit quality of the issuer maynegatively affect the market value of the securities. Most preferred securities may be redeemed at par after five years. Ifthis occurs, holders of the securities may be faced with a reinvestment decision at lower future rates. Preferred stocks arealso subject to other risks, including illiquidity and certain special redemption provisions.

Required Disclosures

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be,directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the researchreport.

Issuer credit risk rating definitions



Appendix

The UBS CIO issuer credit risk rating reflects the opinion of the relevant UBS CIO analyst regarding an issuer's risk of anear- to intermediate-term dividend deferral on preferred securities, and/or issuer payment default on debt obligations.Low Risk: The issuer is considered to be in solid financial condition with strong credit fundamentals and low likelihoodof a near- to intermediate-term dividend deferral, and/or issuer payment default. The issuer's securities are of generallyhigh quality.Medium Risk: The issuer is considered to be in adequate financial condition with satisfactory credit fundamentals relativeto the near- to intermediate-term dividend deferral, and / or issuer payment default. The issuer's securities are of mediumto weaker credit quality and may have higher volatility than those of Low Risk issuers. These instruments should thereforeonly be held by risk tolerant investors.High Risk: The issuer is considered to be in weak financial condition with deteriorating credit fundamentals or the stateof the issuer's financial condition and credit fundamentals may be uncertain due to volatile market conditions. Sectorconsiderations may be a dominating factor. There is a high likelihood of a near- to intermediate-term dividend deferral,and / or issuer payment default. The issuer's securities are speculative.Note: Distinctions in the credit quality of individual security instruments may vary based on the maturity of the instrument,as well as the relative priority within an issuer's capital structure. These distinctions will be discussed in our future creditreports, as applicable. In regions outside the United States, the UBS CIO office will map these distinctions to security-level risk flags.

Issuer credit outlook definitionsThe UBS CIO issuer credit outlook reflects the opinion of the relevant CIO analyst regarding an issuer's credit qualityoutlook over the succeeding 12 months. For rated securities, this may include the likelihood of a change in the publishedrating by a nationally recognized credit rating agency/statistical rating organization.Improving: We expect the credit profile of the issuer to improve, to an extent that may justify upgrades by rating agencies.Stable: We do not expect the credit profile of the issuer to change meaningfully.Deteriorating: We expect the credit profile of the issuer to deteriorate, to an extent that may result in single-notch oreven multi-notch credit rating downgrades by rating agencies.

For a complete set of required disclosures relating to the companies that are the subject of this report, please maila request to UBS CIO Global Wealth Management Business Management, 1285 Avenue of the Americas, 8th Floor,Avenue of the Americas, New York, NY 10019.

Disclosures (7 February 2020)Altria Group Inc. 2, 3, 4, Apple Inc. 1, 2, 3, 4, 5, AT&T Inc. 1, 2, 3, 4, 7, 8, 9, 12, 13, Bank of America 1, 2, 3, 4, 5, 7,8, 9, 10, 11, 12, Boeing Co. 1, 2, 3, 4, 6, Citigroup 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 13, 14, 23; Comcast Corp. (Cl A) 2,6, 15, 16, 20, CVS Health 1, 2, 3, 4, Dow, Inc. 1, 2, 11, Duke Energy 1, 2, 3, 4, eBay 1, 2, 3, 4, 10, Exelon 1, 2, 3, 4,Ford Motor Co 1, 2, General Electric Co. 1, 2, 3, 4, 7, 9, 11, 13, 16, 17, 21, General Motors 1, 2, Goldman Sachs 1,2, 3, 4, 7, 10, 11, Home Depot Inc. 2, 3, 4, 6, 12, JPMorgan 1, 2, 3, 4, 5, 7, 9, 10, 11, 13, Kinder Morgan, Inc. 2, 13,McDonald's Corp. 2, 3, 4, 6, 13, 15, Microsoft Corp. 1, 2, 3, 4, 5, 7, 9, 10, 11, 16, 22, Mondelez International 2, 3, 4,Morgan Stanley 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 13, MPLX LP 1, 2, Oracle Corp. 2, 3, 4, PepsiCo Inc. 1, 2, 3, 4, 7, 8, 10, 18,Philip Morris Intl Inc. 1, 2, 3, 4, 7, 8, 9, Plains All American Pipeline LP 2, 6, 12, Southern Company 1, 2, 3, 4, 8, 10, 12,U.S. Bancorp 1, 2, 3, 4, 10, 12, Verizon Communications Inc. 2, 3, 4, Viacom Inc. (Cl B) 2, 12, Wells Fargo 1, 2, 3, 4, 5,7, 8, 9, 10, 11, 12, 13, 15, 19, Western Midstream Partners LP 2, 6, 12,

1. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products andservices other than investment banking services from this company/entity.2. UBS Securities LLC makes a market in the securities and/or ADRs of this company.3. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.4. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services otherthan investment banking services from this company.5. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month'send (or the prior month's end if this report is dated less than 10 working days after the most recent month's end).6. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.



Appendix

7. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment bankingservices from this company/entity or one of its affiliates.8. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securitiesof this company/entity or one of its affiliates within the past 12 months.9. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investmentbanking services are being, or have been, provided.10. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or have been, provided.11. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securitiesservices are being, or have been, provided.12. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equitysecurities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recentmonth's end).13. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment bankingservices from this company/entity within the next three months.14. The fixed income analyst covering this company, a member of his or her team, or one of their household membershas a long common stock position in this company.15. The equity analyst covering this company, a member of his or her team, or one of their household members has along common stock position in this company.16. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has along common stock position in this company.17. UBS Securities LLC is acting as Lead Financial Advisor to General Electric Company on the sale of its commercial andindustrial lighting business, Current, powered by GE, to American Industrial Partners.18. UBS is acting as advisor to PepsiCo on its acquisition of Pioneer Foods Group.19. UBS Securities LLC is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offeringof securities of this company/entity or one of its affiliates.20. Barry McAlinden, or one of his/her household members has a long common stock position in Comcast Corp. (Cl A).21. Barry McAlinden, or one of his/her household members has a long common stock position in General Electric Co..22. Barry McAlinden, or one of his/her household members has a long common stock position in Microsoft Corp..23. Frank Sileo, or one of his/her household members has a long common stock position in Citigroup.

Preferred Securities Ratings Definitions

Rating Definition

AttractivePreferred securities on the Attractive List are those that we view favorably based on (1) fundamentalcredit quality, (2) valuation and (3) structure (security characteristics).

NeutralWe believe that issuers of preferreds on the Neutral List are likely to meet the coupon payment but wedo not deem the preferreds to fit the definition of our Attractive or Unattractive Lists.

Unattractive

We may deem these preferred securities to be Unattractive for fundamental reasons, for valuationreasons, or because of their structure. In the case of fundamental drivers, we have concerns that thecredit profile may deteriorate. Sector considerations may also be a factor. In the case of valuation, webelieve that price/yield levels do not adequately compensate investors for the risks.



Appendix

Disclaimer

UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Managementbusiness of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS").The investment views have been prepared in accordance with legal requirements designed to promote the independenceof investment research.Instrument/issuer-specific investment research – Risk information:This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sellany investment or other specific product. The analysis contained herein does not constitute a personal recommendation ortake into account the particular investment objectives, investment strategies, financial situation and needs of any specificrecipient. It is based on numerous assumptions. Different assumptions could result in materially different results. Certainservices and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/ormay not be eligible for sale to all investors. All information and opinions expressed in this document were obtained fromsources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to itsaccuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any forecasts,estimates and market prices indicated are current as of the date of this report, and are subject to change without notice.This publication is not intended to be a complete statement or summary of the securities, markets or developmentsreferred to in the report. 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UBS relieson information barriers to control the flow of information contained in one or more areas within UBS, into other areas,units, divisions or affiliates of UBS. Futures and options trading is not suitable for every investor as there is a substantialrisk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee forits future performance. Additional information will be made available upon request. Some investments may be subjectto sudden and large falls in value and on realization you may receive back less than you invested or may be required topay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment.The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel andother constituencies for the purpose of gathering, synthesizing and interpreting market information.Research publications from CIO are written by UBS Global Wealth Management. UBS Global Research is written by UBSInvestment Bank. Except for economic forecasts, the research process of CIO is independent of UBS Global Research.As a consequence research methodologies applied and assumptions made by CIO and UBS Global Research maydiffer, for example, in terms of investment horizon, model assumptions, and valuation methods. Therefore investmentrecommendations independently provided by the two UBS research organizations can be different. The compensation ofthe analyst(s) who prepared this report is determined exclusively by research management and senior management (notincluding investment banking). Analyst compensation is not based on investment banking, sales and trading or principaltrading revenues, however, compensation may relate to the revenues of UBS as a whole, of which investment banking,sales and trading and principal trading are a part.Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not providelegal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both ingeneral or with reference to specific client's circumstances and needs. We are of necessity unable to take into account the



Appendix

particular investment objectives, financial situation and needs of our individual clients and we would recommend that youtake financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein.This material may not be reproduced or copies circulated without prior authority of UBS. Unless otherwise agreed inwriting UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS acceptsno liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this material.This report is for distribution only under such circumstances as may be permitted by applicable law. For information on theways in which CIO manages conflicts and maintains independence of its investment views and publication offering, andresearch and rating methodologies, please visit www.ubs.com/research. Additional information on the relevant authorsof this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; areavailable upon request from your client advisor.Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to considerand incorporate environmental, social and governance (ESG) factors into investment process and portfolio construction.Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways.Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participatein certain investment opportunities that otherwise would be consistent with its investment objective and other principalinvestment strategies. The returns on a portfolio consisting primarily of sustainable investments may be lower or higherthan portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager,and the investment opportunities available to such portfolios may differ. Companies may not necessarily meet highperformance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any companywill meet expectations in connection with corporate responsibility, sustainability, and/or impact performance.Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG,UBS Europe SE, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V.,UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG.UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial ServicesInc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reportsto US persons. All transactions by a US person in the securities mentioned in this report should be effectedthrough a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contentsof this report have not been and will not be approved by any securities or investment authority in the UnitedStates or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity orobligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal AdvisorRule") and the opinions or views contained herein are not intended to be, and do not constitute, advice withinthe meaning of the Municipal Advisor Rule.External Asset Managers / External Financial Consultants: In case this research or publication is provided to anExternal Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the ExternalAsset Manager or the External Financial Consultant and is made available to their clients and/or third parties. For countrydisclosures, click here.Number 06/2019. CIO82652744© UBS 2020. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.



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