Investing.com -- UBS says tariff-related risks remain the dominant concern among investors this summer, though markets appear to be pricing in a benign outcome.

“Tariffs remain by far the biggest risk cited by investors,” analysts wrote, noting that credit spreads have rallied close to their tightest levels of the year, “suggesting markets are pricing in a benign outcome with striking complacency.”

Most investors are said to be positioned defensively. “Cash balances for EU funds were historically elevated at the start of June,” UBS noted, but many have since been deployed, especially by those lagging benchmarks and “participating in primary deals – even sometimes in transactions considered unattractive.”

Meanwhile, the bank says that investors who started the year ahead of targets are holding onto cash, “poised to ‘buy the dip’ should volatility resurface.”

UBS sees value in using rates markets to hedge credit portfolios, recommending receiving September or July ECB contracts, calling them a more efficient and cost-effective hedge than CDS given current pricing.

Among tactical trades, UBS opened a long position in EU IG cash vs. iTraxx Main. “The IG space offers superior asymmetry, being less crowded than the HY trade,” and tends to outperform CDS in the summer due to seasonality and tightening secondary liquidity.

Investor positioning is now split into two camps, according to the bank. First, those who were long early in 2025, and then “those who were underweight credit risk and have since been forced to chase their benchmarks.” UBS believes any renewed tariff-driven volatility could present buying opportunities.

Despite expectations of slower growth and possible Fed easing, many clients “pushed back on the timing,” favoring a summer marked by low volatility and thin liquidity.

Still, UBS continues to prefer high-yield over investment grade in that scenario and sees upside in tariff-sensitive sectors like autos and energy.

Meanwhile, the bank stated: “Given low correlations to spreads and concentration in the credit universe, we see limited risks from volatile oil prices, which supports our neutral view on Energy.”