Daily EMEA

18 September 2026, 04:38 UTC Chief Investment Office GWM Investment Research

How to position in fixed income as Fed hikes rates UBS House View - Daily EMEA Mark Haefele, Global Wealth Management Chief Investment Officer, UBS Switzerland AG Thomas Wacker, CFA, Head CIO Credit, UBS Switzerland AG Frederick Mellors, Strategist, UBS Switzerland AG Dean Turner, Economist, UBS AG, UBS AG London Branch Daisy Tseng, Strategist, UBS AG Singapore Branch Kazumasa Ishii, Strategist, UBS SuMi TRUST Wealth Management Co., Ltd. Teck Leng Tan, CFA, Strategist, UBS AG Singapore Branch Themis Themistocleous, Head Chief Investment Office EMEA, UBS AG London Branch

From the studio What to watch: 18 September Podcast: Europe’s political pendulum swings wider, • UK August retail sales onAppleandSpotify(26 mins) • ECB President Lagarde speech Video: Market Playbook | Why higher rates alone don't mean lower equities(6 mins)

Video:UBS Explains | What is happening in the US bond market? (5 mins)

Thought of the day The Federal Reserve delivered a hawkish 25-basis-point rate hike this week, lifting the fed funds target range to 3.75-4%. Fed Chair Kevin Warsh described the move as removing “a dose of accommodation,” adding that broad financial conditions could not be characterized as restrictive.

The latest Summary of Economic Projections showed that policymakers now expect stickier inflation and stronger growth than they did previously. The “dot plot” put the median policy rate projection at 4.1% for 2026, suggesting another hike this year, while eight participants projected a third hike in 2027.

The hawkish tone from Warsh, together with broad support among policymakers for two or more rate increases, prompted investors to price in three further hikes by the end of 2027.

We maintain our expectation for another hike in December, and view current market pricing as excessive, although we acknowledge that risks are skewed to the upside. The median policy rate projection suggests a hold throughout 2027, and we expect steady disinflation over the next six months. Favorable base effects in the first half of next year should also weaken the case for a long sequence of hikes.

Against this backdrop, we discuss how investors should position in fixed income.

This report has been prepared by UBS Switzerland AG, UBS AG London Branch, UBS AG Singapore Branch, UBS SuMi TRUST Wealth Management Co., Ltd.. Please see important disclaimers and disclosures at the end of the document.

Bonds continue to play an important role in portfolios. We maintain an Attractive view on fixed income. Higher starting yields reinforce bonds’ role as a key source of portfolio income, while high-quality bonds can provide valuable diversification if economic growth slows. We see select opportunities across regions and market segments, and believe investors should calibrate both credit risk and duration to their objectives and investment horizons.

Consider adding duration selectively in high-quality bonds. More income-focused investors may prefer shorter-maturity bonds to reduce duration risk, but the recent sharp rise in yields has created tactical opportunities in medium- to long-duration high-quality bonds. Alongside attractive income, these securities have scope for price gains if tighter monetary policy slows growth or reduces longer-term inflation expectations, leading yields to decline. In credit, we believe stronger investment grade issuers offer attractive carry across medium tenors. For higher-risk credit (such as high yield and emerging market bonds), we prefer short-dated exposure.

Avoid the longest maturities. We remain cautious on the longest-dated bonds despite compelling valuations over a lack of catalysts for a sharp drop in long-end yields. Fiscal sustainability concerns, growing AI-related debt issuance, and a shift toward more price-sensitive buyers could keep term premiums elevated, in our view.

So, we think a measured approach that balances income, diversification, and sensitivity to interest rates can help investors strengthen their portfolios as they navigate further tightening ahead. For those in lower-rate jurisdictions (such as Switzerland), retaining diversified income…