Investment strategy insights

17 September 2026, 12:00 UTC Chief Investment Office GWM Investment Research

Why global bonds deserve a fresh look Investment strategy insights Authors: Matthew Carter, Strategist, UBS AG London Branch; Frederick Mellors, Strategist, UBS Switzerland AG; Tom Nash, Strategist, UBS AG

• Global bond yields have moved higher, hurting capital returns. The outlook for major central banks is more hawkish, suggesting further volatility ahead for yields.

• That said, global bonds can still offer appealing income and portfolio diversification for patient investors.

• Rebalancing excess cash into quality bonds and select high yield and emerging market credit may help improve portfolio resilience. Source: UBS

Global bond markets have repriced to a world where US we believe now may be a good time to review fixed income growth and inflation pressures look firmer than previously allocations and consider rebalancing. expected, the conflict in the Middle East appears more protracted than hoped, and oil supply disruptions look set Higher starting yields can offer a larger cushion to endure. For much of the past decade, bonds offered slim income Strong US employment, steady economic growth, and opportunities in many markets. Starting yields were firmer US price pressures (especially in the services sector) extremely low, leaving little yield “cushion” to offset periods have all reduced expectations for US policy easing and of market volatility. Today, the situation is very different. increased expectations of further Fed tightening. The Federal Reserve delivered a hawkish hike in September, with While bond prices remain sensitive to movements in a unanimous decision to raise rates 25bps, while projections interest rates, investors are now entering the market with point to a median two-hike path and rates on hold in substantially higher yields. That income stream is once again 2027, with upward economic projections for PCE and core doing much of the heavy lifting. Across investment grade, PCE inflation. We expect the Fed to raise rates again in high yield, and emerging market bonds, coupon income is December. helping cushion the impact of rising yields and reducing the likelihood of losses over a 12-month investment horizon. In the Eurozone, the European Central Bank (ECB) recently raised rates, and its updated staff projections suggest that Despite a significant reassessment of monetary policy inflation pressures will prove more persistent than previously expectations, rising government bond yields, and concerns thought. Headline inflation is forecast at 3.0% in 2026, about inflation, many credit sectors have continued to 2.5% in 2027, and 2.1% in 2028. Compared with the June generate positive total returns because income has more projections, the forecasts for 2027 and 2028 were revised than offset bond price declines. The relationship between up by 0.2 and 0.1 percentage points, respectively. Core yields and returns has become considerably more favorable government bond yields have recently traded at some of for long-term investors, in our view. their highest levels since the global financial crisis. We now expect the ECB to raise rates again in December. Higher yields also mean investors have a larger yield cushion. Breakeven calculations indicate that many fixed income For investors already allocated to bonds, rising yields and sectors can absorb a meaningful rise in yields before total falling bond values can seem unsettling. But from a longer- returns fall below zero. For example, spreads on euro term perspective—and for investors sitting on excess cash— investment grade and high yield debt would have to rise

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

roughly 90 and 180 basis points for total returns to fall to momentum. zero, while the comparable figure for EM corporate bonds (JPM CEMBI Index) is roughly 150 basis points. Supportive technical conditions have also underpinned performance. While spreads are near historically tight levels, Although forecasts for bond price appreciation have return potential continues to be supported by…