Bonds

17 September 2026, 21:33 UTC Chief Investment Office GWM Investment Research

Bonds CIO View: Bonds Frederick Mellors, Strategist, UBS Switzerland AG

• We maintain an Attractive recommendation on the bond asset class, Global Asset Class Preference Attractive with corresponding Attractive recommendations on the high grade, investment grade, emerging market, and high yield subasset classes.

• The past month has been challenging for the asset class, as bond yields rose further to new cyclical highs. The main concerns remain inflation and the escalating conflict in the Middle East, which continues to disrupt energy markets and put upward pressure on prices. These factors have led central banks globally to adopt a more hawkish stance, pushing short-term rates higher as markets price in a series of rate hikes. Source: Shutterstock

Note: This month, we have updated our • Our view has shifted as a result. Previously, we expected the Federal Reserve to remain on hold throughout this year. However, given the multi-asset Asset Class Preference framework escalating conflict and ongoing solid growth in the US economy, we to bring together two useful perspectives. shifted to anticipating rate hikes after the August payrolls report. The We continue to display Absolute views FOMC subsequently raised the fed funds rate by 25bps this month (Attractive, Neutral, Unattractive), which to 3.75-4%. Given near-term inflation dynamics, we anticipate a show our expected absolute direction for follow-up hike by year-end. Importantly for the asset class, market a given asset. Now, we also display relative expectations already price in another 75bps of hikes. Our base case preferences (Preferred, Neutral, or Least is that these hikes will not materialize, which could support capital Preferred), to make it easier for investors gains. We also expect the high level of yields to be the primary driver to see which assets we like more—or less of total returns. Higher yields provide a sizable cushion against further —than the alternatives within their asset increases in rates, although losses remain possible. class, or across asset classes. For more information, please see the latest UBS House • Given these developments and the fact that policymakers have View Monthly Extended. become increasingly concerned about instability in long-term rates and, ultimately, their credibility, we see rate hikes as providing some stability at the long end. Therefore, we see tactical opportunities to extend duration. Medium- to long-duration, high-quality bonds have scope for price gains and could act as valuable diversifiers in an economic downturn, in our view.

• On the credit side, we recommend that exposure to higher-risk credit remain relatively short-dated, whereas stronger investment grade issuers offer attractive carry across medium tenors. Overall portfolio credit risk and duration should ultimately reflect investors’ objectives and investment time horizons.

• Despite ongoing macroeconomic uncertainty, credit markets have remained resilient. Developed and emerging market credit spreads have been stable, supported by solid fundamentals, strong demand, and high starting yields. Two themes remain important: elevated debt issuance by US hyperscalers and potential spillover risks from pockets of the private credit market. On the former, demand is meeting supply; however, spreads have widened to levels indicative of multi- notch downgrades. Given hyperscalers’ strong balance sheets and operating cash flows, we view the wider spreads as reflecting heavy new-issue supply rather than deteriorating fundamentals. AI-related

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 6.

disruption is affecting businesses that borrowed through private credit and direct lending channels. Realized losses are weighing on private credit sentiment and the syndicated loan market, which also provided funding to AI-disrupted sectors. So far, there has been no contagion to other credit segments, such as high yield, which have had limited exposure to these sectors. Gating by private credit funds may also have limited forced asset sales…