What's takeaway 1 on Around the Horn?

UBS portfolio managers emphasize caution in the fixed income space amid lingering uncertainties.

What's takeaway 2 on Around the Horn?

The importance of liquidity strategies highlighted as a means to navigate year-end volatility.

What are the market implications for Around the Horn?

Traders should focus on the USD's performance as year-end repositioning can introduce volatility, particularly in the context of fiscal policy changes. Watch for key levels around 1.075 against EUR, as any notable shift or announcement may guide market sentiment.

What are the risks to this view on Around the Horn?

The call could be invalidated by unexpected fiscal developments, such as an extended government shutdown or aggressive monetary tightening from the Federal Reserve. Any significant market shifts could force a rapid reevaluation of fixed income strategies and currency expectations.

Around the Horn: Monthly Fixed Income Roundtable with UBS Asset Management

What the desk is arguing

The UBS Asset Management roundtable emphasized the persistence of market uncertainty as key economic policies remain in flux, particularly surrounding the government shutdown and its implications. Portfolio managers underscored the importance of maintaining robust liquidity strategies in a potentially tight credit environment.

A central theme was the need to monitor the impacts of seasonal adjustments and year-end portfolio rebalancing, as evidenced by ongoing volatility in fixed income markets. Portfolio managers specifically highlighted potential shifts in demand for municipal bonds amid tax considerations, underscoring that a strategic allocation can capitalize on emerging opportunities.

Where it sits in our coverage

Our FX desk currently holds a positive outlook on the USD against certain pairs with a consensus target of 1.075 for the USD/EUR. Specific targets from major firms are as follows: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

The views from UBS resonate with our expectation of a moderately bullish USD trajectory, consistent with our existing targets. Our positioning may reflect an inclination towards the upper bounds of current consensus forecasts.

How other firms see it

Firms aligned with similar views include jpmorgan, which supports a more bullish stance on the USD, in contrast to bofa, which holds a more bearish outlook. This divergence could suggest a tightening spread in U.S. Treasury yields compared to European bonds, impacting forex pairs such as EUR/USD and USD/JPY.

Additionally, the liquidity dynamics mentioned in the UBS commentary could influence shifts in investor sentiment and allocation strategies, particularly as we approach the end of the year.

What the calendar says

With no significant economic events scheduled in the next month, traders should remain attentive to any government policy announcements or fiscal changes that could disrupt market stability. A potential government shutdown or new fiscal measures could act as catalysts for volatility in upcoming trading sessions.

We are back now with the next installment of our Around the Horn with UBS Asset Management's Fixed Income Team podcast series. I am pleased to welcome this month's featured speakers, top managers and business heads from Asset Management's Muni Taxable Fixed Income and Liquidity Teams. We do hear candidly from them on their views on markets and what they believe you, our financial advisors, should be focused on within the fixed income space.

So joining us for this month's update, I'm glad to welcome back Anthony Liotti, head of the Fixed Income SMA Advisory Group. Anthony will also serve as our moderator for today's roundtable. Anthony is joined today by Dave Walczak, Senior Portfolio Manager for Asset Management's Liquidity Strategies, Dave Rothweiler, Senior Portfolio Manager for Asset Management's Short Duration and Liquidity Strategies, Dave Vignolo, Head of Asset Management's U.S.

Corporate Fixed Income Strategies, Anders Nelson, as well as Patrick Matejvich, Portfolio Manager for the U.S. Multi-Sector SMA. We also have David Michael joining us, Portfolio Manager for Emerging Markets, and Lisa DiPaolo, Portfolio Manager and Deputy Head of the Municipal Investment Team.

So greatly appreciate everyone's time. Anthony, let me now pass it over to you to moderate this month's roundtable. Welcome back.

Yes, Dan, great to hear your voice. Welcome back to you. Happy holidays to everyone as well for the November call.

We are recording this call on November the 20th, so a little bit later than we typically do just because of what was or what was not actually transpiring in the markets as far as the government shutdown. So I'll have some high-level comments, and then like we always do, we'll turn over to the PMs to discuss what we're doing within our portfolios and what we're seeing, broadly speaking, across all the markets. So as we move into the back half of November, the market backdrop continues to be a bit foggy, clearly because of the government shutdown.

Still limiting access to key economic data, and clearly we're getting some as we speak today or this morning, but the market has really had to do its best simply relying heavily upon Fed commentary, corporate earnings, and sort of less traditional, if you will, analysis to understand how the economy is truly progressing. I'd say in the absence of meaningful hard data, the market has had very little anchor conviction in either direction, which is normal, and as a result, we've been stuck in a fairly restrictive tight trading range. Equity markets and risk assets such as particularly crypto have clearly felt the sharpest pressure of the positioning unwinds.

Fixed income, though, has continued to perform well and has reminded us folks that they can and fixed income can be a good hedge under normal economic downturns. On the economic front or hiring front, we did get some data today. I would say the no hiring, no firing mantra that has, I'd say, dominated much of this year is fading.

Companies across multiple sectors are announcing meaningful staff reductions at a time when, you know, it's taking longer for people who are out of work to find new jobs, and this is signaling, you know, a change in corporate sentiment and a growing acknowledgement of the broader economic pressures that we're really beginning to see. It's also exactly a type of softening that the Fed has been watching closely as part of their dual mandate, particularly as it evaluates whether the labor market is really, truly cooling and is sufficient to support further progress on inflation, but as it stands right now, the probability of a cut in December has come down a bit. It stands around 30%, so it doesn't look right now as that the Fed will make a move in December, but as we turn the calendar and we get more data, perhaps that January meeting is a 50 basis point cut.

So some really interesting times. You know, I would say this too. At the same time, from the Fed and the market standpoint, it is becoming harder to ignore this cage-shaped narrative economy that we're in right now, right?

The divergence creates an economy where headline numbers can appear fine, yet the underlying consumer experience differs dramatically across different economic or income levels, right? And it really does continue to complicate the Fed's job because strength and stress are happening simultaneously within the same economy. On the fixed income side, the tone remains constructive.

We used the last call, we used a bit of a Goldilocks period, and after a strong multi-week rally in yields, yes, they drifted a little bit higher, which was a bit refreshing, but all in yields within fixed income remain fairly compelling. You know, for meanies, I'd say much more so on the long end, where we're seeing, you know, continued investor demand, but yields or taxable coupon yields do remain above 7%. So there's still some really good buying opportunities out there.

Supply across fixed income, you know, whether it be taxed in meanies or taxables has remained really robust. Within each of those market or asset classes, we're on page two clips, prior annual issuance records. And with the beginning of, you know, this being the week of November 17th, you know, most issuers realistically have about two true weeks left in the year to come to the market.

If you factor in, you've got next week being the holiday week of Thanksgiving, you've got the upcoming Fed week, and then, you know, when you get to December, the last two weeks of December are basically, you know, non-event. And so even though the calendar has a bit more reach to it from a market standpoint, it's going really to begin to quiet down. And, you know, the last point I'll make here before turning over to Dave Walczak is, you know, the environment for fixed income, I would say, and you'll probably hear this from our PMs, is we're staying selective, but investing, you know, clearly makes sense.

I think that the tone is going to be focusing on quality income, measuring risk with the recognition that volatility will continue to stay somewhat elevated. And so with that, David Walczak, let me turn it over to you. Thanks, Anthony.

And great to be with everyone today. So as you mentioned, we've seen a shift in market expectations around the next Fed meeting, especially after Powell's comments at the press conference at the October meeting, where he basically said that the summary meeting is not a foregone conclusion in terms of it being another meeting where the Fed would look to ease. We've also seen subsequent FOMC speakers, especially some of the more hawkish ones on the committee, you know, pushing back on the notion of an additional cut at the summer meeting.

It seems like a lot of these members are flagging concerns around inflation, especially due to, you know, some potential follow through of the tariff impact. So to make their way through into the data, it does seem like, though, the view of at least Chair Powell and also other members of the committee is that this tariff impact is going to be, you know, more of a one-time adjustment and less persistent over time. But of course, we've got to wait to see kind of how these measures come in over the next several months.

So as you mentioned, Anthony, we currently see about nine basis points of cuts priced into the December meeting. You compare that to about 17 basis points, as was the case at the close of the October Fed meeting. So we definitely have seen the market price out more cuts since the October meeting.

And then cumulatively, including this December meeting, looking through to the end of next year, there's about 88 basis points where the cut's currently priced into Fed Funds futures. You know, I also wanted to chat just briefly on what we've been seeing in overnight funding markets. You know, we've been seeing some recent articles, and they've gotten some inbound inquiries into the desk just about some of the volatility that we're seeing in overnight repo rates.

We've seen SOFR, which is the Secured Overnight Financing Rate, it's basically a measure of overnight repo rates, move higher in the Fed Funds targeted range of late. In fact, if you look back to month end, we saw that per net of 422, which is 22 basis points higher than the upper end of the Fed's targeted range of 375 to 4%. So definitely seen some unusual moves here.

So what's causing some of these recent pressures? Well, you know, most directly at month end, it was kind of several factors. You know, one, it was Canadian year end.

So Canadian banks are generally bigger intermediaries in the repo market. So given it was their year end, they're less directly involved. We've seen higher cash balances at Treasury.

So that withdraws liquidity from the market. And we've also seen quite a bit of supply of T-bills, which, you know, Treasury has embarked on ever since the resolution of the debt ceiling earlier on this year. And it's really been probably the past several weeks of net T-bill supply increases leading into the October month end, I think, you know, caused a little bit of congestion in markets.

You know, the good news is, you know, we've seen the Treasury cash balance start to tick lower, it's expected that it will, you know, continue to move lower here over the next several weeks. And we've also seen, you know, less supply of T-bills as well. So it's on the margin, you know, contributing less in terms of upper pressure on overnight funding levels.

So how's the Fed reacted, you know, at their October Fed meeting, they announced the end of quantitative tightening effective December 1. So really, what that means is they're going to basically keep their balance sheet around the same size and not allow it to continue to decline. I think part of what that informed that part of what informed that decision was, you know, we've seen bank reserves move lower in recent weeks.

So just by virtue of that, the market has less degrees of freedom to operate within the funding space. So I think the Fed recognized that and they're looking to keep the balance sheet steady there. We've also heard them continue to highlight the importance of the standing repo facility, which was a facility introduced after some of the repo stress back in September of 2019.

We did see pretty elevated usage at October month end. But I think, you know, the Fed's still encouraging the streets to use that facility. But, you know, dealers still cite some of the stigma associated with that facility.

And then also to from their standpoint, it's not as operationally efficient from a balance sheet standpoint. You know, it still causes some issues from some of the ratios that they need to manage too. So we'll see if there's any further refinements to that facility to make it a little bit more palatable for dealers to use.

But the good news is we have seen SOFR fall from the month end highs, but we're still seeing a trade elevated within the Fed Fund's targeted range. And, you know, of course, we have another month end coming up and then, of course, year end coming up shortly thereafter. So we wouldn't be surprised to see some further volatility.

But I think the good news is that it definitely has the Fed's attention and, you know, we'll see if there's any further announcements to come there. But one thing I've always highlighted is, you know, money market funds, when they do engage in a repo transaction, they are lending cash and receiving collateral. So these higher SOFR or repo rates do stand to benefit money market funds.

And then any securities that are held with SOFR as the reset rate, we'll see a higher yield as a result of some of the volatility that we've been seeing. So with that, I'll pass it over to Dave Rothweiler. Yeah, thanks a lot, Dave.

So getting into the front end, you know, we wanted to touch on some of the dynamics around corporate new issuance going forward. While there's some risk to any forecast, we expect 2026 to have higher investment grade gross supply, with some on the street forecasting as much as $1.8 trillion surpassing the record set in 2020. Some key drivers for the uptick, issuers will be refinancing around $1 trillion in maturities in 2026.

There'll also be higher M&A issuance and a significant uptick in tech and media issuance to fund the AI CapEx boom. In terms of net issuance, which takes into consideration coupons maturities, net issuance will also be higher than they were in 2025, but still materially lower than the record in 2020. When it comes to the expected issuance in 2026 and the impact on various sectors, gross financial supply may increase only modestly.

The biggest decline may come from the U.S. banks, to reduce supply needs post the SLR reform. We have been favoring financials versus industrials for a while, and we will most likely continue to do so in the near future, given this positive technical going into 2026. On the flip side, industrials are likely to see more issuance coming from, again, technology, media, and entertainment to fund AI CapEx and M&A.

What's the employment data this morning? Risk assets are rallying. While we are engaged in credit, we have been favoring more of an up-and-quality bias for quite a while.

Month-to-date, BBBs have slightly underperformed A-rated paper in the one-to-three space. On the duration side, we have tended to be close to neutral as slightly long versus the index heading into year-end. So, with that, I'll pass it on to David Nola.

David Nola Yeah, thanks, David. You know, on investment-grade credit, I'd say this month, these last 20 days or so for November, have definitely been a little bit of a struggle for credit. You know, the uncertainty with, you know, we had no government, for the government shutdown, no economic data.

So, there were some concerns that, you know, how much was growth slowing, and we saw reports come out of Ampington about job losses at certain companies when they made announcements. And David Walther just talked about supply. We've seen, you know, record months for October and probably going to have another record for the month of November for supply.

So, even though our demand remains quite robust into the asset class, supply has been a little bit heavier than expected. So, absorbing that, concerns about growth, and then the talk about the Fed might not cut in December. And we've seen rates, you know, drift up a little bit.

It's been a little bit of a deterrent for credit spreads, and they've drifted a little wider these last three, four weeks. But we've started to stabilize, I think, a little bit these levels, because our all-in yields are now more attractive from where they were earlier in the month. So, we're seeing more demand come back in into the space.

But, in general, we're still very comfortable with credit. Growth is still positive. Fundamentals, third quarter earnings were quite robust and strong across the board.

The banking sector didn't imply any kind of consumer concerns about consumer weakness. So, from a fundamental perspective, everything's good. We're still attractive yields.

They're a little more attractive lately. Positive growth, even though it's slowing. And you have an environment that, up to this point, technicals have been a very, very strong driver for credit.

But supply will be a big hot topic in 2026 and how that unfolds in terms of how it puts pressure on the market and if demand, you know, slows somewhat as we move into the next year. But, in general, we're still, you know, a favor and overweight in financials. We still have, we've been adding and moved to an overweight in the technology sector.

We are taking advantage of these attractive new issues that come to the marketplace with their concessions into the marketplace to bring these deals that are coming to the marketplace, as David mentioned. You know, so far, Amazon, Google, Meta, big, big deals, you know, $20 billion, $15 billion, $30 billion, large deals across the entire curve. So, you can see big issuance in the 30-year, the 10-year, the 20-year, which has been very well-received because they're high-quality issuers and they're bringing debt out of the curve and people are starved for log-in debt, especially the insurance and pension plan.

So, it's been attractive concessions for everybody. So, it's been, I think, an attractive entry point for us to add to those names and to put them into the model for our TFI strategies, you know, going forward. So, we're definitely adding more of those types of names into the model.

But across the board, I'd say, you know, outside of that, we're looking to add more exposure in the TMT sector going forward. But I think there's, as David Woff-Ryler mentioned, there's a lot of, I think, next year, there's definitely going to be much more M&A activity. It started, really, this last quarter, you know, with rates kind of stabilizing and kind of have a little more familiar with the landscape from the Trump administration and the tariff uncertainty sort of normalized where we kind of understand the game a little better about how this is going to proceed.

M&A activity is definitely going to pick up. So, next year, it's really going to be critically important, you know, as I say, old school blocking and tackling, you know, issuer selection and being proactive in the M&A space, avoiding the names that have downgrade risk from an M&A type activity, sector rotation like we're doing in the technology sector and overweight the banks and looking at TMT in the media space and adding exposure there. Underweight the healthcare and pharma because we continue to see increased regulatory risk and M&A activity peaking in that, increasing in 26 in that sector as well.

And then, curve position, you know, we like the belly of the curve still that, you know, four to, you know, eight-year part of the curve. We still favor that as an overweight. We still like having high yield exposure in the active intermediate strategy, you know, running around 6% to 8%.

You know, target that and we've taken down our treasury exposure to fund from those purchases. Our triple B exposure is pretty constant. We haven't really moved much there, as David said, up in qualities continues to be our theme.

But I would say that certain industries, if they bring attractive deals in the mid-triple B space, we'd probably be more inclined to participate in those names going forward. Duration, you know, we're kind of hugging around the benchmark for our active intermediate strategy. Nothing like to extend if we see any kind of backup yields, but we've been pretty close to neutral at this point in the game.

But overall, as the government reopens and we see more data, the credit market going to the year of December supply is supposed to really fall off at Thanksgiving. Historically, December is very low. So, if that comes to fruition, I could definitely see inflows coming in and driving our spreads back to the lows that we saw about a month ago in the marketplace.

But in general, still stay fully invested, but a little more up in quality bias. But there's definitely going to be more opportunities. And our strength is what I talked about, the blocking and tackling, issuer selection.

So, I'm looking forward to next year in terms of opportunities that will present for our strategies. And with that, I will pass it over to Patrick to talk about the multi-sector strategy. Yep.

Thanks, David. Thanks to all the Davids, my favorite running gag on this call. From the multi-sectors standpoint, multi-sector team standpoint, we're maintaining our, I guess, now consistently held belief on U.S. rates out the curve, that their apps are main range bound.

And that's something you've heard us mention on this call ad nauseum before, as well as the notion of counter-trading the movement within those ranges in a disciplined way. Last month, we've mentioned a 10-year range of, call it, 390 to 430. That's where we've stayed.

And it meant sticking to our knitting and shedding duration when rates fell to the lower bound of our target around when the 10-year was in the 395 area. At the time, we felt the likelihood of policy expectations being recalibrated was kind of overdue, and that perhaps the market collective was, at that point, a little too dour on labor generally. And so that meant cutting duration across our book of business to a neutral posture.

But really, that means maintaining a lower conviction on directionality. So far, at least, this trade has proven fruitful. Looking forward, shorter term, our suspicion is that rates continue to leak somewhat higher, which would pose a decent entry if we were to touch upper bounds.

But it's still sensible to begin nibbling on duration even here and consider, as my colleague mentioned, December Fed cut changes have swung to a low now of 30%, perhaps a bit too far as the market pendulum often does, which is swing too far. Right now, we're awaiting a more obvious catalyst to emerge, say, in prices or other labor data that suggests that easing impulses from the Fed should increase. Today's labor picture wouldn't qualify.

And I would just note that November CPI comes December 10th. That's the same day as the FOMC rate decision. Curve-wise, we've liked steepeners.

We've mentioned that before. 5.30s have fallen to a low of roughly 92 at October month end. We're now back to 105, and we continue to believe that a general curve steepness is the overall medium-term trajectory. My colleague says they usually do beat me to the punch on the general view on credit in the backdrop.

I will just mention our team sector-wise, we've shrunk our treasury, taxable muni, lower-spread investment-grade corporate exposures in lieu of EMD, and to a lesser extent, high yield, just having seen spreads widen, not yet subscribing to the notion of a material downward shift economically. As mentioned, valuations have improved, earnings still robust, technicals have been strained, but as Vigs really highlighted quite well, that could reverse somewhat with all-in yields having increased and just the general appetite for income that exists given the demographics of wealth out there. We're at the ready-to-reduce exposure tactically.

We need to see some evidence of a greater labor weakness, though, and in turn, that would mean greater consumer weakness as Q4 wears on, and we'll obviously keep our eyes on that. That's a big if, however. With that, I will turn it to Mr.

David Michael for more transparency on EM. Thanks, Patrick. Another David here.

Emerging markets really continues to be one of the best-performing fixed-income asset classes, benefiting from multiple factors. Attractive all-in high yields, which create attractive valuations, strong and improving fundamentals, and that's why emerging markets have seen net inflows in 24 of the last 29 weeks. Over the last month, spreads continue to tighten.

We are another 20 basis points tighter. With this positive return, now brings the year-to-date number up almost 13%. That's not only the best-performing fixed-income asset class, but it's a fixed-income asset class providing returns similar to the S&P 500.

In Argentina over the last month, there was market-friendly midterm election results, and the country has seen net dollar inflows due to bond issuance from provinces and corporate credits. Panama had a negative outlook from Moody's at BAA3, and they saw their ratings affirmed with no downgrade. This has continued to support valuations in Panama as spreads have rallied.

Saudi Arabia continues to reflect very strong growth, over 5% annually, and only 31 basis points of that has come from the oil sector. This is reflecting the strong growth from non-oil sector in Saudi Arabia, over 4% growth over the last five years from that sector. Venezuela bonds are reflecting strong price returns, and this is due to the increased U.S. military presence in the region, leading some to believe that there could be regime change.

Emerging markets are still seeing more upgrades than downgrades, further reflecting the strong fundamentals, and when combined with our positive technical outlook, this strengthens conviction on our relative outperformance of emerging market fixed income relative to other fixed-income asset classes. Now let me hand it off to Lisa for an update from our municipal investments team. Thank you very much.

I would say the market tone has turned increasingly positive as we approach the year-end on the new side, just supported by higher redemption dollars, strong mutual fund inflows, and a fairly manageable new issuance calendar. I think so far November's performance reflects this strength. Positive market technicals and surging investor demand really have helped unis outperform in the third quarter.

As the holiday season approaches, I do think uni markets were entering a period of constructive seasonals, just characterized by expected decline in primary issuance, while reinvestment flows stabilized. Right now, November and December reinvestment cash totals approximately $37 billion per month, and then you look at that versus supply for November, it's going to total $46 billion, and December is anticipated at $47 billion. Also seen, like I said, inflows coming in marks the 12th gain we've seen in the past 13 weeks, just in terms of LIPR inflows.

So I think these dynamics should help keep uni to treasury ratios just probably more largely range-bound through the end of the year, and then we might see a potential for more renewed compression in ratios as we move into next quarter. Looking at the curve, yields have shifted significantly just beyond the short end. That one-year AAA MMD yield averages right now about 257 for the year.

We have seen that one- to 30-year MMD slope averaging 174 basis points this year, and we have seen more long-end binds. However, if you look between 10 and 30 years, the curve has steepened by 20 basis points this month, kind of versus the annual average. With that December fed rate height looking less unlikely, I think Anthony said 30% favor, short-term yields may remain, I think, anchored, so a long-end demand persists, just supporting a little bit of a steeper curve.

Issuance, total issuance so far in 25, it's on pace for a second record year. We're expected to see year-to-date volume total 585 billion, so up 16% year-over-year. A lot of this is issuance just driven just by strong market technicals and just the infrastructure financing needs by issuers.

As Anthony alluded to, there's a limited number of full trading weeks remaining in 2025. We have recently taken advantage, I'd say, of that new issue calendar, which continues to offer just more compelling value relative to the secondary market. I think looking ahead, the dominant theme for the remainder of the year will be evolving supply-demand dynamics.

That said, though, we will closely monitor how supply interacts with demand as we navigate potential Fed policy decisions during tax-loss harvesting and just conditions overall in the primary market. In terms of positioning, we maintain the duration-neutral stance for intermediate funds. We're targeting 3.5 and 3.8 years for intermediate.

Barbell positioning continues to unwind, just in favor of reallocating that 6-7 year, 10-11 year, and 15-17 year buckets. Sector allocations we've adjusted as well. And just to touch upon credit, Moody's did upgrade Illinois at the end of October to A2 stable.

They did study improving financial metrics. So with that, we have seen some spread compression. We have still been adding to our Illinois Geo position as well.

And with that, I'll hand it over to Anthony. Great. Thank you, Lisa.

Have a wonderful holiday week next week, Thanksgiving. Be safe, and we'll talk to you in December. Thank you.

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Around the Horn: Monthly Fixed Income Roundtable with UBS Asset Management

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Around the Horn: Monthly Fixed Income Roundtable with UBS Asset Management

What the desk is arguing

Where it sits in our coverage

How other firms see it

What the calendar says

Sources & References

Primary source