High grade

20 August 2026, 21:31 UTC Chief Investment Office GWM Investment Research

High grade CIO View: High grade Tom Nash, Strategist, UBS AG Frederick Mellors, Strategist, UBS Switzerland AG

• We have an Attractive rating on high grade bonds. Global Asset Class Preference Attractive • Events in the Middle East and their subsequent impact on energy 10-year US Treasury yield prices, concerns around government debt and deficits and ongoing CIO Forecast bond supply continue to impact near-term bond market returns. Positive long term trend • Investors should focus on the elevated yields levels on offer, which US 10y should ensure positive total returns going forward. 20 Aug 26 4.67

• High grade bonds (rated AA- or better) offer low default risk Dec 26 4.25 and therefore present an appealing risk-return profile, in our view, Jun 27 4.00 particularly in a world of heightened geopolitical risks and expensive Refinitiv, UBS risky asset class valuations.

• We distinguish between European high grade—where we see value out to longer maturities relative to the US—and the UK, where we continue to favor shorter maturities.

• After rallying in June, global bond markets have in recent weeks seen yields push higher, with the largest moves in long ends. This has weighed on the performance of fixed income segments with longer durations and interest rate sensitivity such as high grade. Shorter-duration segments have performed better, supported by limited changes in central bank policy rate expectations and high starting yields.

• Hostilities in the Middle East continue to generate uncertainty for markets. Notwithstanding the recent rise in energy prices, inflation expectations remain considerably lower than their March-April peaks. Front end rates in the US and Europe remain elevated, in large part reflecting an overly hawkish interpretation among investors about how central banks will respond to what remains primarily a supply-side inflation spike. Our core thesis remains that current yield levels offer an attractive combination of income, diversification, and medium-term return potential. Markets continue to price policy settings that appear tighter than those we expect to ultimately be delivered, particularly considering evidence that underlying inflation pressures are relatively benign and may be moderating. Additionally, recent labor market data is not showing signs of strength. While geopolitical risks, fiscal concerns, and elevated bond supply remain important considerations, these risks are increasingly reflected in valuations. As a result, we continue to see scope for yields to drift lower over the coming quarters, generating potential capital gains alongside attractive carry. Regionally, we retain a preference for extending duration in Europe, where policy and economic factors appear most supportive, while favoring shorter maturities in the US, where fiscal dynamics and policy uncertainty continue to argue for some caution further out on the curve.

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 4.

• In the US, 10-year Treasury yields moved toward 4.7% while 2-year yields remained relatively unchanged over the last month. We maintain our preference for shorter-dated bonds in the US given our view that the Fed is likely to stay on hold. That stands in contrast to market pricing of nearly two rate hikes over the coming year. Recent commentary from key Fed officials has highlighted continued vigilance around inflation risks, but the data have not yet provided convincing evidence that a tightening cycle will be required imminently. In fact, the July inflation releases declined year over year and the monthly run rate was likely cool enough to keep the Fed on hold. Tariff pressures remained contained, and housing shelter costs continue to moderate. Of note, there are some tentative signs of AI-related demand inflation in digital goods beyond software and accessories. On growth, there remains a narrowness to activity, centered around AI infrastructure investment and the associated rise in asset prices. Households in aggregate are experiencing flat or negative real wage growth and…