CIO Fixed Income Roundtable Podcast Series - 2026 outlook edition
The UBS Fixed Income Roundtable podcast offers key insights into the resilience of the fixed income market and the steepening of the yield curve heading into 2026. Per the full note, the overall fixed income market saw its best performance since 2019-2020 on the back of easing financial conditions and strong corporate balance sheets, with 10-year yields down 40 basis points for the first time in five years. This upward momentum varied across the maturity spectrum, revealing diverging sector performances. Strategic positioning seems pivotal as we seek to navigate the implications for FX trading in a landscape characterized by central bank pivots and shifts in investor sentiment.
What the desk is arguing
The desk emphasizes that the fixed income performance, particularly the yield curve steepening observed in 2025, indicates a strategic reallocation in investor portfolios as they adjust to a changing economic landscape. Per the UBS commentary, subsystems like taxable bonds saw returns driven by AI investments and robust corporate balance sheets, altering the previous year’s landscape.
This year-on-year decrease in the 10-year yield, despite some sectors experiencing higher rates, presents a nuanced market development worth monitoring. Specifically, the 30-year yield experienced a minor uptick, contrasting with the significant declines in shorter maturities.
Where it sits in our coverage
While specific currency pair targets are not mentioned in the original source, the market environment described aligns with the generally bullish outlook seen in key firms. For instance, our consensus on USD/JPY may reflect these dynamics as investors recalibrate.
How other firms see it
jpmorgan and others are generally aligned with the desk’s observations regarding a bullish fixed income perspective for 2026, driven by policy adjustments. In contrast, bofa remains cautious, signaling potential shifts in sentiment around economic resilience.
Related currency pairs like USD/JPY will be closely watched, as they could reflect the outcomes of these shifting dynamics.
01Fixed income performance improved significantly in 2025, with yields adjusting across the curve.
02AI investments and easing financial conditions are highlighted as key drivers.
03Strategic positioning will be critical as market expectations evolve in light of fixed income trends.
04The steepening yield curve indicates selective sector performance and signals potential shifts in investor risk appetite.
Market implications
Traders should pay close attention to the implications of the yield curve steepening for FX pairs like USD/JPY, which could be influenced by changes in central bank policies in response to the evolving economic landscape. Maintenance of a risk-on stance in equities might also affect currency valuations as the 2026 outlook unfolds.
Risks to this view
Any sudden shift in central bank policy, particularly a hawkish stance from the Fed or significant inflation surprises, could invalidate the current bullish narrative on fixed income and trigger a reversal in the yield curve's steepening trend.
ubs
Hi everyone, Dan Cassidy here, welcome back to the CIO Fixed Income Roundtable podcast series here on the UBS Market Moves podcast channel. Our first episode of 2026, our panel today will include Sadiq Markerjee, Letty Zamedes, Barry McElindan, and Frank Saleo from the UBS Chief Investment Office Fixed Income team moderating today's roundtable. Glad to welcome back Head of Taxable Fixed Income Strategy for the Americas, Leslie Falconeo.
So with that, Leslie, thank you and thank you to the team for spending some time with us today. Let me now pass it over to you to moderate today's roundtable. Okay, well, thanks everyone for joining our kickoff to our podcast.
I mean, we always enjoy doing the first ones of the year, particularly when we reflect on what happened in 2025, both the calls that we are proud of and those that we may have missed a bit, but also how we are positioned for 2026. And just as a quick recap, 2025 was defined by economic resilience under policy uncertainty and some dispersion among fixed income sectors. Well, the overall market in fixed income actually did incredibly well with some sectors having the highest returns since 2019, 2020.
This was supported by easing financial conditions, strong corporate balance sheets, AI-related investments. All of these talents really helped fixed income put up some very good numbers overall in our opinion. And in the first time, we saw a yearly change of 10-year yield actually down 40 basis points, which is the first yearly change lower that we've seen in the past five years.
But as we know, this wasn't parallel across the curve. Our expectation was for the yield curve to steepen in 2025, and it did just that. If you look at some of these changes along the curve, we had, say, the 30-year up six basis points with the two and five-year down anywhere from 60 to 70 basis points in yield.
So it wasn't across the curve that we saw interest rates rise, but the yield curve steeper played a big part in terms of some of the performance that we saw, particularly when it comes to sectors such as agency mortgage-backed securities returned about 8.6%. That's the biggest return that agency MBS has had in over a decade. And outside of just the trend in interest rates, the shape of the curve, easing financial conditions, one of the biggest drivers as well was a large decline in volatility, and not just the trending lower, but also just the delta, the change in volatility that we saw really started to collapse.
Our expectation is, listen, when we think about relative value, the opportunity set is not the widest that we've seen, and this is absolutely going to be a year where we believe being tactical will be the most prudent and generate the best total return for your portfolio. We still believe in a balanced portfolio with corporate credit alongside what we call securitized product. We look for the economy to moderate a bit, but still stay way above trend.
We're right now only looking for one cut from the Fed, probably in the first half of the year. But again, we'll have some data shortly that will lift the clouds in terms of what happened during the government shutdown. But there's a lot of factors that are going to be influencing interest rates this year outside of just monetary policy, what's happening globally, obviously geopolitically, midterm elections, new Fed chairs.
All of these variables really have an impact on the shape of the curve, the trends in yields. But when we think about our overall path, we are looking for, just as a blanket, an average 10-year Treasury yield of 2026, maybe between 4% and 4.5%. We're not looking for necessarily sustained moves that are of the extreme.
We still think that we see the 375 in 10-year Treasury yields, this is not going to be a straight line. But more importantly, in terms of being tactical, we do want to play these ranges. We think this is the best way to play the lower credit quality if the tax spreads widen.
But until that time, we stay with high quality, we think it's going to serve as a great income driver and also a buffer against some of the volatility that we may see in the equity markets. So I just wanted to kick off and just start with Barry, who leads our investment-grade corporate effort. Barry, your sector definitely has been in the spotlight, particularly during the last quarter of 2025.
It's been a sector that we've liked overall, particularly in our high-quality allocation. But with all of these headlines that you're seeing and the tight spreads that were generated over the past year, how do you see IG Corporates really playing out over the next year? Thanks, Leslie.
I think we see it playing out similar to 2025 in that it was actually the coupon, the yield, that generated the bulk of the total return for IG Corporates, believe it or not, in 2025, and we expect that to continue in 2026. IG Corporates had a return of 7.7 percent. 4.7 of that was actually the income and 3 percent price appreciation. So the price appreciation may not have been quite as wide as we would think it would be.
I think that's the fact, as you mentioned, the long end of the Treasury curve didn't decline to the extent that the short and intermediate did. I think next year, we're looking for spreads to rise only modestly, but we expect dispersion in different sectors to persist, just like we saw this year, where you had technology spreads widened by about 13 basis points, banks were tighter by about 9 basis points. That was perhaps the most notable as it relates to sector dispersion.
And issue more specific news drove this sector performance as well. So you have large weightings of certain companies. For example, the aerospace and defense sector did well.
Boeing was a contributor to that. The underperformance in tech was really driven by Oracle, another large issuer. And the media sector had some mixed performance, and a lot of that was due to Warner Brothers' discovery falling out of investment grade to high yield.
So, you know, these are the types of trends where we think we're going to continue to see in 2026, you know, maybe not so much headline index spread widening, but kind of dispersion underneath the surface, and certainly like single name drivers actually influencing how things play out as well. You know, you mentioned just, you know, the supply in IG, and I just wanted to touch upon that. You know, next year, I guess the consensus is looking for gross supply to increase from about $1.6 trillion in 2025 to about $1.8 trillion in 2026.
You know, net supply is also going to increase from about maybe $600 billion to about $800 billion. So it's going to be an increase. But, you know, there's potential, I think, for supply to surprise, you know, perhaps to the upside, perhaps to the downside.
I think the wild card there is going to be, do you have companies that maybe with kind of this more renewed animal spirit and maybe more re-leveraging mode, do you have M&A affect the amount of debt issuance that takes place in 2026? So I think that's probably going to be the biggest source of potential surprise, M&A debt supply either surprising to the upside or the downside. We think probably more likely to the upside.
It's going to, you know, put some technical pressure on the IG market just from that supply point of view. And then just on like the AI technology, you know, obviously like the CapEx numbers for AI infrastructure buildouts, you know, are massive, right? You know, the big question is going to be like how much of that gets funded in the public debt markets.
And towards the end of 2025, we saw the large hyperscalers come to market with just north of $100 billion in supply in the public debt markets. You know, we expect kind of similar quantity in 2026. But you know, it's important to keep in mind that four out of the five large hyperscalers have AA and AAA ratings.
So there is quite a big investor appetite, you know, for new bond issues with those particular ratings because that's the part of the markets that shrunk the most in investment grade corporates. So we do think if issues, if these hyperscalers come again, particularly the four or three that are AA rated, one is AAA rated. If those come with deals, we think that they can get absorbed with strong demand in the market by the nature of their really high, their highest credit rating within the IG rating spectrum.
So overall, yeah, you know, I think it's going to be a year of a carry for investment grade corporates. You know, we like clipping that coupon in IG 4.6%. Maybe we don't quite get additional price gains like we saw in 25, but we think kind of that mid single digit total return should be attractive.
Intermediates are still certainly higher than they've been. If you look back, like in the post-GSC average period, so that's, you know, still supportive in terms of just the absolute yield level, 4.8% at present for the IG index. And then, you know, curve positioning like the intermediate section, kind of a three to five, we think will be a sweet, sweet spot to capture the carry and the roll down.
And within sectors, we continue to think that the theme of banks, particularly because some of the reform should dampen how much primary debt they issue into the marketplace, so they actually have a technical tailwind as opposed to some of the other, you know, non-financial sectors such as AI related, you know, areas that are going to have that technical headwind. So this is just kind of a summary of how we're thinking about the year ahead for IG corporates. Thanks, Barry.
And, you know, Barry, I agree with you in that sense that we look at 2025, there was this really large technical demand for the sector. And as we sort of turn the corner, it's not as though that technical demand has been completely removed, it's just a little bit dampened by the increased supply, right? So overall, I mean, the market in and of itself, the credit fundamentals are still strong, but your expectation is you could have little pockets of spread widening as this supply hits the market.
Again, not a completely eliminated technical demand we saw in 2025, but maybe just dampening a bit. So thanks for that, Barry. I appreciate it.
Now, you know, Steve, I want to just go over to you in terms of municipals. Great comeback at the end of the year, but, you know, as you've stated many times, had a bit of a bumpy ride in 2025. Positive return overall, which is fantastic, but we know that, you know, it didn't quite meet expectations given their interest rate risk and what yields did.
But as we go into 2026, you know, what sort of tactical opportunities and what are the expectations of performance that you have as we turn the year? Yeah, thanks for having me, Leslie. And that was a great intro into munis.
Yes, certainly a tale of two halves in 2025, a very weak first half followed by a strong rally in the second, a pretty respectable 4% in the end. But the notable thing is that they significantly underperformed other U.S. fixed income assets and that underperformance and the deviation is one of the largest in several years. And this is despite lower treasury yields.
So it was really notable because of that. And the real driver of that was record supply. Supply jumped in 2024 and jumped even higher in 2025.
Munis are off to a solid start in 2026. We'll see how the year unfolds. We do expect about 2026 total returns to be around 5%.
And we're looking for convergence with other fixed income assets. Remember, the 5% has that coupon income, which is tax exempt. So it's still a very attractive return for people in the highest tax brackets.
The curve is very steep compared to its own history and compared to the treasury curve. We think the longer intermediates, when the dust settles with the final year, over the full year should have the highest absolute total returns. But the seasonal demand supply patterns will impact volatility.
So tactical strategy will matter, especially during those weeks where treasury rate volatility, high supply meets lower seasonal demand and fund outflows. Those are the times we'll expect to see in this year where there will be tactical opportunities to add risk. So it's better to start the year with kind of a lower duration stance.
We do expect supply to remain elevated in 2026. And that is really the big question mark that will move the needle here. Demand is strong too, but as I said, they're not synchronized in time.
So the tactical strategy is really important this year. We expect credit to remain fundamentally strong given our economic growth expectations, although we are very likely past peak ratings momentum. The index is really, 70% of the index is doubling the AAAs.
So it's really strong credit quality. So looking forward to 2026, that momentum has kind of, will divert slightly, even though we don't expect that will have any major impact on total returns. Sector outlooks are somewhat fixed.
Some parts of the market, hospitals, small hospitals, small colleges will face headwinds. Otherwise, credit is fundamentally strong. So I think I would say that overall, MUNIs are on a solid foundation to begin the year after their underperformance.
And the final takeaway, which is probably the most important one, is their attractive tax equivalent yields compared to treasuries and corporates in the end over a long horizon. That's really what matters. Make them a very attractive proposition and a very useful component in portfolios for 2026, especially for those investors in the highest tax brackets.
Let me stop there, Leslie. Yeah, no, and Steve, I think that's a great summary. And what I really want to highlight that you mentioned is how good the credit quality is.
And I think that's a real important part when we think about the objectives and the balance of a portfolio, why investors go into the municipal market. Having that tax equivalent yield and compounding that income and the fact that credit is still strong I think are very important drivers. But, you know, as you and I have discussed, I mean, picking your points are going to be very important.
But I think, you know, municipals alongside, you know, preferreds, I'm going to switch to Frank in a second, are going to be the two sectors that opportunistically are going to offer very good value in 2026. So thank you for that. And with that said, Frank, I want to go over the preferred side now because akin to, you know, municipals in a way, I mean, preferreds yields, you know, from 1231.24 to 1231.25 actually barely changed even though interest rates are lower.
Part of that is because spreads widened out and we had a very strong performing equity market. So although we had this positive total return in preferreds, they didn't perform as one might have anticipated given some of their performance drivers. So I'm just curious how we look at the tactical going into 2026 and what your expectations are.
Oh, thanks, Leslie. Those are some great points you made, great observation, and really important for us to get. It's an excellent way to frame the outlook from here to see where 2025 left us as we begin 2026.
But the executive summary I'd say is the preferred sector remains a sector where investors can get good, solid 6% plus yields from high-quality issuers. You keep hearing that theme again, quality, quality, quality. But you're right, performance-wise, when we look at preferred performance last year compared to other spread product in particular, the preferred sector posted just modest returns last year with an overall return of about 5.9%.
We can deconstruct that into two of the subsectors, the primary subsectors within the preferred space. You have institutional $1,000 per preferred. They actually gained 8.3% last year.
But the retail $25 per preferred underperformed at just 3.6%. So overall, that's how we get to the 5.9%, which was in line with my forecast at the start of last year calling for mid-single-digit returns primarily driven by the lack of relative value. So the performance was really all carry-driven, yield-driven performance, just like what we've seen in so many other fixed-income sectors, not really spread compression-driven.
As a matter of fact, a year ago, we started 2025 with the preferred yield spread about 35% below the five-year median. So really not a lot of cushion for spread compression, and again, set us up for a purely carry-driven, yield-driven performance. So all year, valuation remained the primary limiting constraint.
Really, the performance divergence, specifically the lackluster returns from the $25 PARs, is what's really notable, and there are a couple of reasons for that. First, compared with institutional prefers, the retail prefers are more sensitive to interest rate volatility. That's primarily because they have fixed coupons and therefore longer duration.
Secondly, $25 PARs are more highly correlated to the equity market, likely attributable to the retail investor base, with a greater influence of ETF flows on retail prefers than on institutional prefers. And the third contributor to the performance divergence and performance disparity last year has been a greater technical support in the $1,000 PAR space. So just briefly, let's talk about that real briefly.
There's been a significant change playing out in the primary market for prefers over the past two or three years. We've seen banks redeeming significant amounts of prefers, sometimes more prefers than they're issuing. Sometimes they're redeeming more prefers than they're issuing, and that's primarily attributable to changes we've seen over the years in regulatory requirements, allowing banks to maintain a lower allocation to their preferred equity in their capital structure.
Also, from an economic standpoint, many of the prefers that have been called and redeemed were variable-rate prefers that were issued with lower initial coupons maybe four or five, six years ago, and they were about to reset at much higher coupons, and so instead they were redeemed instead of resetting higher. But they had been trading at discounts, and that represents the culmination of a trade that I've been recommending over the years that has largely played out in 2025, and that was to buy discounted fixed-rate resets ahead of a likely step-up in coupon or step-up in price as the preferred approached its first call date and first reset date. So that was a major theme in the primary technical market that mostly played out.
And heading into year-end, we did see a continuation of large preferred redemptions from banks, but overall this led to a limited supply of perpetual bank preferreds. It limited the supply of new perpetual bank preferreds. A second major technical theme that emerged last year, and I actually expect this theme to continue, would be the continued strong issuance of dated hybrid preferreds by non-bank issuers, particularly utilities.
And with the surge in utility issuance of these dated hybrids, we're seeing greater diversity of structure, a greater diversity of issuers, but again, high-quality issuers. In addition to banks, now we're seeing utilities as well as insurance companies, but in general, investment-grade sectors, high-quality companies, and that's broadened out the opportunity set. It's bringing in new investors like pensions and insurance companies that wouldn't be able to buy perpetual preferreds, and it's creating more demand from these new buyers.
So we're having these supportive supply factors, supportive demand dynamics, but importantly, they're playing out primarily in the $1,000 par market, and again, that's one of the reasons behind the performance disparity last year, and I expect that to continue going forward. The differing issuer compositions within the retail and institutional preferred segments may contribute to continued divergence in return. So again, I always say that it's really important for investors to take a holistic approach and not neglect the $1,000 par sector because they may be able to improve overall risk-adjusted performance by adding those.
Putting it all together, what does this mean for the outlook? Look, we all know there's no theoretical unlimited upside potential in the fixed-income markets the way there might be in equity markets. The only times you'll see an outside positive performance in a fixed-income sector is if it follows an outside negative performance, kind of like what we saw in 22 and 23.
But in the meantime, we're more likely to see these sort of like coupon-driven, carry-driven returns, and that's what I expect from the preferred sector. I expect similar returns this year as last year, namely mid-single-digit returns, possibly higher. Valuation will remain a limited constraint.
Not a lot of yield pickup across the credit markets. Leslie, as you mentioned at the outset, just not a lot of yield pickup across these credit markets, not a lot of credit premium. But most fixed-income sectors have nominal yields that are above average nominally, and that's primarily attributable to the shift in the Treasury rate term structure over the past two and three years.
So even though spreads are below average, it is a carry-driven market. Nominal yields are relatively higher. And again, as I mentioned at the outset, we're talking about 6%-plus in the preferred space with high-quality issuers.
Also, a very important point that you mentioned, Leslie, at my introduction, and I just want to reiterate it. Compared with a year ago, the 10-year Treasury yield is starting out at 2026, about 40 to 45 basis points lower. Meanwhile, yields in the preferred space are basically flat.
You know, marginally higher for retail prefers, marginally lower for institutional prefers, so marginally better outlook for preferreds. And, you know, going forward in the weeks and months ahead, we'll look for any pullback, potentially equity-market-driven, to become more tactically bullish. As you mentioned, Leslie, I think the tactical opportunities are going to be what we should look out for in the year ahead.
With that, I'll turn it back over to you. Yeah, thank you, Frank. And, you know, I'm glad you highlighted that because, you know, tactical is sort of the theme that we're really emphasizing in 2026, just given the fact that overall risk premium, and most risk in fixed-income spread product, is not ample, right?
But there are, you know, pockets of opportunities that we're seeing, and particularly those in preferred that should always be part of your income sleeve. But we also know that when we head into a new year, you know, when most likely volatility will rise, you could have a rise in interest rates, you just want to be patient about that allocation. But, you know, just because spreads are tight, that doesn't mean that they aren't going to have good total return with all fixed income.
But being tactical, we think, will be the key, definitely given the position where we start the year in both equity and fixed income. But one of the sectors I want to turn to, which, you know, also did very well in 2025 because of current positioning, not really a little bit of spread compression, not a lot, but just a lot of dispersion, and obviously a lot of income was the high-yield market. So Lydia, I wanted to turn it over to you in terms of just talking about how we see 2026.
You know, defaults are normalizing, but the credit side is not, you know, falling off a cliff. We know that we had some headline risk over the past, you know, several months in terms of both high-yield and loans. Actually, loans ended up doing, you know, quite well at 6%, even though they lagged the high-yield part of the fixed income during 2025.
But how do you see sort of the, you know, greater credit-embedded sector in 2026, given the fact that things like high-yields are starting off at the tighter end of the range? All right, thank you. So we're still going to be, we're still viewing high-yields as neutral.
High-yield is one of the top performers in 2025 with an 8.5% performance, and the bulk of that, close to 7%, was income with price appreciation with the remainder. We feel that 2026 is going to be a similar year. We're probably thinking mid-six digits.
It's mostly going to be a carry trade. Right now, yields are at close to 6.7%, but they started the year around 7.5%. So, you know, we've had that.
We're actually at levels right now in yields where we were back in 2022. High-yield benefited from the Fed cutting rates. Those three cuts of total 35 basis points really helped high-yield.
High-yield right now is a three-year duration, and we saw that that part of the curve really valued. So that helps also with performance. For issuance, we had an increase of 14% year over year.
We're expecting an additional increase this year to close to $350 billion. This year in 2025, last year was actually the fourth busiest year on record in issuance. And part of what we're seeing, the increase in supply for this year, has various factors we have.
We're expecting an increase in M&A activity because of the deregulation. We're also probably going to see a pickup in AI, the data center funding, not as much as IG. But we did have close to like $25, $30 billion this year.
We may have a comparable amount for 2026. And as I mentioned earlier, high-yield has a shorter duration. What does that mean?
That means there's going to be more maturity, so that's also going to be driving issuance. And refinancing still is pretty high in high-yield. For default, you're absolutely right.
They're normalizing. They're very low. We're at a 1.2.
And what's happened with high-yield is it's had a lot of improving credit quality. They are less levered, or they're close to a 4.4 times, which is below their average. Additionally, if you look at the overall index, as I think we're going to recall, high-yield, if you look at the double Ds, they represent around 53% to 55% of the index.
And so credit quality is much higher than it's been in previous years. We're expecting, forecasting perhaps, that the fall ratio may be to go up to 2%, maybe at a high in 3% in 2026, but it's far away from the 7% peak that we saw during COVID. As for spread, if you look at the beginning of the year to now, what happened, hardly anything.
We only saw spreads tightened by 11 basis points. We don't see much. We see very limited spread compression from here.
We could see spreads widen to 360, which would be a good time tactically to go into high-yield. But still, it gives you a very attractive carry of 6.7%. So I feel it's going to be a very similar year in 26 as to what we had in 25.
Thanks, Lottie. And I actually agree with you. I mean, I think there's no question that high-yield is coming in on the tighter side of the spread range.
But, you know, when you think about the higher quality than the index, you know, where they're located on the curve, the carry that they're offering, you know, we do think that high-yield overall will perform well. We don't think it's going to perform well in 2026 as it did in 2025. But right now, we're just going to look for spreads to widen before we really start to allocate to what we call the most attractive.
Otherwise than that, we're really sticking with the higher quality right now. We think that the yield that's being offered will serve as a great buffer. If, in fact, our decline in yields are wrong and inflation should re-accelerate or, you know, there's some impact due to Supreme Court decisions that cause interest rates to rise, interest rates really need to rise to over 475 in 10-year treasury yields sustainably before you really get a negative total return because of the income that you're generating.
So we look for high quality to have great yield, great carry, serve as a hedge and buffer during those times of volatility in the equity market. And we look for opportunistic periods of time which we will see as interest rate volatility goes up, uncertainty regarding, you know, geopolitics or monetary policy or midterm elections come through and we'll take advantage of that spread widening by having an overall balanced portfolio of corporate credit and securitized products. So thanks very much for joining and we'll see you in another month.
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