Bond markets

18 September 2026, 09:21 UTC Chief Investment Office GWM Investment Research

Quality income Bond markets Authors: Thomas Wacker, CFA, Head CIO Credit, UBS Switzerland AG; Rochus Baumgartner, Co-Head CIO Credit, UBS Switzerland AG

• In line with the overall investment grade bond market, our "Quality income" selections incurred slightly negative total returns over the last four weeks, as yields in all major currencies increased and central bank expectations were repriced higher.

• Supportive market technicals and healthy corporate fundamentals have kept credit spreads on our selected bonds tight, while average tenors of around four years have shielded them from the greater losses incurred by longer-dated bonds. We view current yields as offering attractive entry levels, averaging 5.3% for our USD and GBP selections, 4% in EUR, and 1.2% in CHF. Source: UBS • While our Quality income selections may lag riskier bonds in an economic upside scenario and longer-duration bonds in a recession, we believe that, unlike those alternatives, they can offer sound return contributions to a diversified portfolio across a wide range of possible outcomes—a key attribute in uncertain times.

The global rise in bond yields has adversely affected the Figure 1 - Yields of investment grade bonds (in %) performance of our "Quality income" theme selections. Total returns over the past four weeks ranged from zero to -0.6% across the four currencies, while year-to-date returns remain modestly positive, benefiting from decent carry yields. In relative terms, our bond baskets have moderately outperformed a high grade benchmark of short- to medium- duration bonds and held up significantly better than longer- duration bonds.

The key driver of the recent weakness in absolute performance was rising government bond yields, whereas the return contribution from corporate credit spreads exceeded our expectations. Spreads have been supported Source: ICE USD (C0A0), EUR (ER00), GBP (E0L0) index, SBI Corporate by market technicals, healthy company fundamentals, and index, as of 16 September 2026. a solid outlook for economic growth.

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

The sharp repricing of central bank expectations toward a Figure 3 - Total return (y-axis, in %) to a change in series of rate hikes was a key factor behind the recent rise yields (x-axis, basis points) in yields. We see three key reasons for this, which have also prompted us to revise our outlook for the European Central Bank and the Federal Reserve: 1. Resurging prices for energy end products amid the worsening situation in the Middle East have increased the risk of second-round effects keeping inflation elevated for longer than we anticipated a few months ago. 2. Economic growth in the US and Europe is solid, which is remarkable given the energy-price headwinds and is supporting company fundamentals. While this is positive for stocks and credit spreads, stronger economic growth Source: UBS CIO, as of 17 September 2026. will likely also slow the decline in inflation toward central bank targets. 3. Growing concerns about higher food-price inflation amid For our USD selection, this means that the yields on the the El Niño weather phenomenon into 2027 add to a selected bonds would need to rise by another 150 basis more cautious overall inflation outlook. points, to 6.8%, for the portfolio to generate a zero total return over 12 months (see Fig. 3). Conversely, a decline in yields by the same amount would boost total returns to 11.2%. We believe this makes investing in our theme Figure 2 - Market pricing of central bank policy appealing both for the carry yield and for the potential to rates achieve higher returns in a recession-risk scenario, which would weigh on risky assets. Aside from negative surprises to the AI story, recession risk could also result from higher inflation prompting aggressive central bank hikes that ultimately lead to an economic slowdown. This is not our expectation, but it highlights the value of quality bonds in covering risk scenarios at the portfolio level, while still contributing decent…