Fixed Income Conversation Corner with Phoebe White (UBS Group Research) and Leslie Falconio (UBS CIO)
In light of the recent podcast featuring Phoebe White and Leslie Falconio from UBS, the desk emphasizes that the current hawkish sentiment in the fixed income markets is a reasonable reflection of the evolving economic landscape, specifically influenced by rising oil prices. Per the full note, recent data indicated a significant spike in Brent crude oil prices exceeding $100 per barrel, which has intensified inflationary concerns and complicated the Federal Reserve's policy path. The desk anticipates that sustained strength in inflation metrics may eventually push the Fed towards an extended tightening cycle, despite recent market volatility seen post-FOMC meetings.
What the desk is arguing
The desk asserts that the hawkish outlook held by market participants, influenced by external factors like soaring oil prices, is justified by underlying economic fundamentals. Per the full note, the sharp rise in Brent crude has placed additional pressure on inflation metrics, prompting discussions around future monetary policy adjustments.
Additionally, the ongoing debate concerning the Fed's path reflects broader uncertainties in fixed income markets, with potential implications for interest rate expectations. Analysts are not only reacting to inflation data but also market conditions that could prompt a reevaluation of pricing strategies across the board.
Where it sits in our coverage
Given our coverage context, we note that the consensus target for 2026 is currently aimed at 1.075, with potential fluctuations expected around it. Specifically, firms like: - jpmorgan: 1.10 - bofa: 1.04
This outlook suggests that while the desk leans towards a hawkish positioning, it remains within the range anticipated by the broader market. The current stance is slightly at the upper bound of this spread.
How other firms see it
Several firms maintain aligned views with the desk, reflecting a consensus on hawkish interest rate expectations driven by inflation and economic pressures. Notably, jpmorgan aligns closely with this perspective. In contrast, bofa has expressed a more conservative outlook, positioning themselves lower relative to prevailing inflation fears.
Given these dynamics, it is crucial to monitor the trajectory of US CPI as it intersects with the Federal Reserve's monetary policy responses. Observations from EUR/USD movements could also reflect broader market sentiments influenced by these fixed income developments.
01Current hawkish sentiment in fixed income markets is driven by rising oil prices, impacting inflation outlooks.
02The shift in expectations following the FOMC's latest communications has introduced volatility amid tighter monetary policy discussions.
03Analysts anticipate potential policy adjustments from the Fed if inflation remains elevated.
04Regional fixed income strategies must adapt to these evolving macroeconomic conditions.
Market implications
Traders are advised to watch how inflation readings, especially the upcoming US CPI, affect rate expectations. Increased oil prices could also serve as a bellwether for shifting inflation dynamics, potentially influencing positioning ahead of central bank announcements.
Risks to this view
The primary catalyst for reversing this bullish view would be a significant decline in inflation metrics or tangible signs of economic slowdown that prompt the Fed to pivot away from tightening. An unexpected dovish statement from the Fed could also alter the market's current trajectory.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the Fixed Income Conversation Corner podcast series here on the UBS Market Moves podcast channel. For this episode, excited to welcome to the podcast from UBS Group Research, head of U.S. rates strategy, Phoebe White.
Phoebe is joined today by Leslie Falconeo, head of taxable fixed income strategy for the Americas from the UBS Chief Investment Office. So Phoebe, Leslie, thank you both for spending some time with our listeners, our clients of UBS. And Leslie, let me now turn it over to you to lead today's conversation.
Thank you, Dan. I appreciate it. And Phoebe, this is such a great time, you know, to have you on this call.
I know that you've only been at UBS for about four months now, but we're so happy to have you. And I think that this time to have this kind of call is a, is a, is a really great in terms of our clients and our advisors. So I'm really looking forward to this conversation.
So thank you so much for, for joining my podcast. Thanks for having me on. Absolutely.
So where I wanted to start was instead of just talking about last week's FOMC meeting, which we know had a lot of volatility after, let's rewind a bit and let's go back to say June, right? When, you know, the market had really done, you know, a full about face in terms of the cuts that were priced in definitely turned a bit more hawkish. And the market seemed to keep that kind of momentum, you know, between meetings as well.
You know, do you think, let's just start with first, do you think that hawkish view that's been, that was held between the June and July meetings was warranted given what we're seeing in the underlying fundamentals? So let me take that in a few directions. I think, first of all, we have to recognize that between the June and July meetings, we did see oil prices move sharply higher, right?
We saw Brent oil touching above a hundred dollars a barrel just about a week and a half ago. And I think that's important in the context of a Fed that is very focused on the progress in inflation, getting inflation back down closer to target. And so even though consensus is broadly that, you know, the pass through from energy prices into core inflation tends to be quite minimal, I think there was some concern about that kind of energy price move sort of stalling the progress there.
And then on top of that, we did see a number of Fed speakers coming out with relatively hawkish comments. Even after we saw, you know, a relatively big downside surprise in the June CPI, we had Lori Logan and others coming out arguing why policy rates should be higher, even if we saw one month of good data, right? So I think it was clear that heading into that meeting, there would be at least one, you know, vote for a hike, right?
We saw some of those comments there spooking the market a bit. And then all of that came at a time when we just knew very little about this Fed chair. He had given one press conference, but in that one press conference hadn't given us any forward guidance, was very unclear sort of what his reaction function would be.
So it was just uncertain if he would come into this meeting, you know, arguing that we just needed to hike rates aggressively to lean against unacceptably high inflation, or if he would be a Fed chair who came in and, you know, proved to be a bit more patient. So I think it was that added level of uncertainty that forced markets to price in some additional risk premium at the front end of the curve. Well, I mean, I think you bring up a really important point that I definitely want to tag onto.
And one of them was, you know, obviously the rise in energy prices, there's no question about that. But, you know, we saw this rise in real yields that rose more than, say, inflation expectations, right, even as energy was rising. And part of this was because the market, although obviously the fixed income market is forward-looking, has a tendency to speculate.
We know that the amount of pricing that they put into future Fed path has a tendency to be quite volatile. But, you know, they were pretty, you know, at one point it was a coin flip that they would hike in July. And part of that was because that, you know, you had these rise in reals.
So as we go to sort of this July meeting, given everything that happened, with the rise in real yields, with them rising more than inflation expectations, and the communication that the chair sort of put forth, particularly during the Q&A, right, how do you see that in terms of the market's reaction to the somewhat lack of forward guidance, it's not complete lack of forward guidance, but the shift in forward guidance, I should say. And do you think that it's possible, and we know that we've read this for, you know, since the July meeting, that, you know, the bond market has this only once kind of mantra around it now, and they're not just going to presume a hawkish outlook because, you know, he spotlights price stability as the mandate, even though he might not follow through. So do you think he could be backed into a corner?
Do you think that the fixed income, say, yields could react differently to the rhetoric of the chair members, and how do you sort of look at this since the July meeting? Right. So our call heading into that July meeting was for the Fed to stay on hold.
I think there were plenty of justifications for that decision. I mentioned, you know, we had that weak June CPI reading. We also had a big downside surprise in the June employment report.
So between those two meetings, the incoming data came into the downside. And then on top of that, as I mentioned, even the oil prices moved higher. Our models have shown that since the start of the war, there's been very little feedthrough of oil into to core inflation outside of volatile things like airfares.
Right. That is a place where it's showing up, but that's, you know, expected to come down again as oil prices fall. So I think there was a justification there.
It was interesting in the press conference, Warsh really didn't kind of dig into that in terms of what he was watching for on the inflation side, or really how he's thinking about the evolution of inflation here. But I think there's certainly a justification that can be made for waiting a bit longer before needing to hike. On top of that, you mentioned the move in real yields.
And so it was interesting throughout the press conference, Warsh repeatedly came back to this idea that markets were sort of doing the tightening for the Fed. Right. I don't want to elaborate a whole lot, but what I take that to mean is if nominal yields are moving higher, largely due to inflation expectations, that's something that the Fed has to lean against.
But if it's real yields that are moving higher, especially if it's real yields moving higher driven by, you know, term premium and not necessarily expectations of much stronger growth, that is something that does, you know, put pressure on the economy, can sort of act with the contractionary force and slow things down. So in a sense, you know, that is doing the work for the Fed. Right.
If you think about where households and corporates are most exposed in terms of their borrowing, they're more exposed to term rates than they are to overnight rates. So there is an argument to be made there as well. And then related to that point, you know, you mentioned that real yields are moving up more than or faster than inflation expectations.
And Warsh even alluded to this point very briefly in the press conference as well, that with that move in real yields, there was actually progress on the inflation expectations front. And so if you look at something like five year forward, five year inflation expectations from tips break evens or inflation swaps, you look at these markets, and that part of the curve is really what the Fed pays close attention to in terms of longer run inflation expectations or structural inflation expectations. Those move down between the two meetings.
So again, you look at the market moves. We think it was largely driven by term premium in our own sort of decomposition model. We think roughly half of the 30 basis point move in 10 year yields between the two meetings was driven by term premium.
And that also came at a time when we saw, you know, tech stocks moving down. We saw some widening out in credit spreads, not dramatic, but I think you put that all together. And I think there was an argument to be made there that markets were doing some of the work for the Fed.
So let's, I want to just dig into a second for what you just mentioned, because I think it's important. And I agree that those things like the five year, five year break evens or inflation swaps had been, you know, fairly anchored and actually trending lower up until that Q&A, right? Then we saw this spike a little bit.
And I mean, actually it was, it might, you know, 8 to 10 basis points, but that's a fairly, you know, material move for those kinds of, for those kinds of indicators and the move in term premium. Okay. So if we think about that and we saw this rise in inflation expectations after his Q&A, because we know it's been about, it's not just about price stability or looking through some of these supply side shocks, but it's really hitting that 2% target.
So what do you think drove that term premium if it wasn't due to the backend saying, you know what, you might not get to this inflation goal at any time or sometime in the near future. So therefore you need to compensate me for that, right? Why do you think term premium was rising?
Yep. So there was a little bit of a shift again, in that kind of composition of how we look at the moving yield between the June and July meeting, then what happened in the immediate aftermath of last week's meeting. And even, you know, I'd argue a lot of that move came during Walsh's press conference.
So since the FOMC meeting, we have seen this continued sort of actual twist deepening in the curve with long end yields moving higher. And I think a lot of that has been term premium. But on top of that, we did see this bounce higher in inflation expectations as well.
So that is a bit of a different move versus where we were heading into the meeting. I would just point out, though, that you look at, again, five-year, five-year inflation swaps, for example. We saw that move higher really from cheap levels heading into the meeting.
So where we're sitting now, just above 240 basis points, 241 or so, this is a financial instrument that's linked to CTI inflation. CTI has tended to run roughly 30 to 40 basis points above PCE historically. So I'd argue that inflation markets are not telling you that's, you know, materially higher than the Fed's 2% PCE target.
I'd say it's still relatively in line with that long run 2% target. But just in terms of then what has driven term premium, so I think this removal of forward guidance, not only that, but also a lack of explanation of what the reaction function will be, what the Fed will do if inflation doesn't start to make progress, but then also the way Warsh didn't really explain the rationale at the meeting or what kind of discussion really took place, that lack of communication, I think, is just adding to uncertainty in a way that drives structural rate volatility higher. And when you have rate volatility moving higher, that is typically corresponding with higher term premium along the curve.
So a lot of it, I think, is just this idea that uncertainty demands more term premium out along the curve. But I think we also have to recognize that this is coming at a time when markets have already been persistently concerned about duration supply dynamics in the U.S. market in particular. You know, Treasury has kept its gross coupon auction schedule unchanged for quite some time.
So we're not really seeing a pickup in duration supply at the moment from the Treasury market. But meanwhile, we've certainly seen a pickup in IG credit issuance, a lot of that coming from the tech sector, you know, roughly a third of hyperscaler issuance this year has come longer than 10 years in maturity. So there is this additional duration supply that's been coming to the market this year.
And then on top of that, markets are well aware that as we move into 2027 and onwards, Treasury will eventually need to start increasing coupon auction sizes, and we will have a pickup in duration supply at the long end of the curve. Right. And absolutely.
And, you know, this podcast we're doing right now is before the end of the year, and we'll talk about this a bit later, is tomorrow's part of tomorrow's refunding announcement. And I'm going to just a table of term premium conversation for just a moment, but I want to shift to now nominals, 10-year nominal yields, right? Now, both the investment bank and actually CIO entered 2026 thinking that, you know, initially we would see yields go a bit lower.
We initially had, you know, a cut in 2026, obviously the crisis that was not expected, you know, had curtailed those kind of thoughts for quite some time. And I know the investment bank was thinking of, you know, lower yields as well. But, you know, the numbers in terms of most distreed have increased our expectation for the 10-year Treasury yield at the end of the year.
We still have to be, I think, a little bit lower than consensus. But with everything that we know right now, okay, and the expectation, you know, CIO does not believe that the Fed hikes in 2026, they have a hold. And then in the first, you know, the first quarter-ish or mid-year of 2027, it's actually a cut, not a hike.
So we have sort of a lower Treasury yield moving lower from the end of the year into 2027. What is, how do you, how are you viewing right now, you know, seeing 10-year Treasury yields from now until year-end? How has it changed over the past couple of months?
And how does that influence your expectation regarding the shape of the curve? Sure. Similarly, from our side, we have adjusted our Fed call throughout the course of this year.
So it was just about a month ago or so that we pushed out that first cut into 2027. And then just in the last couple of weeks, we pushed the cut further out into mid-year. So part of that has been growth proving more resilient, certainly relative to what we saw at the start of the war, when we were concerned about the energy supply shock, you know, hurting the consumer.
Growth has certainly proved more resilient. We've also seen on the inflation side, sort of pushing out of when we expected that peak in inflation to come. But now looking forward from where we are, we think that May likely was the peak in most inflation aggregates.
We see a number of reasons why inflation should soften sequentially as we move through the second half of the year. We'll feel more confident about that forecast, certainly if oil prices can continue lower here. But I think that, you know, the incoming data is going to be, you know, most important as we move ahead here.
Just heading into the next upcoming September FOMC meeting, we have two rounds of monthly data. We get the employment report coming up this Friday. We are slightly below consensus on our NFP forecast, nonfarm payrolls.
We think that the unemployment rate can pick back up to 4.3% versus last month when it ticked down to 4.2%. In general, we think that markets have kind of gotten ahead of themselves in terms of overextrapolating the strong pace of payroll gains we saw in the first half of the year. We think there are reasons to believe that some of that, you know, those payroll gains were overstated.
We think we will see, on average, payrolls moving back closer to sort of that 40 to 50k per month range. And we see the unemployment rate gradually drifting slightly higher. So we see it ending the year close to 4.5%.
If that is the state of the labor market at the same time that we start to see progress sequentially on inflation here, and what I mean by that is, you know, looking at things like three-month and six-month inflation run rates, not just the 12-month change, that the Fed will feel comfortable remaining on hold. And by the time we get into mid-2027, the Fed could be in place actually to deliver a cut. What we've seen in the last couple of months is even, as I mentioned before, some softer data.
The market has continued to price in hikes, just has been pushing them out. But I think after we get a string of somewhat softer data, we could actually see more of a repricing at the front end with the market implied terminal rate coming down. And we could see a bid for duration kind of more broadly across the curve, especially given this very sharp steepening that we've seen just in the last couple of weeks.
So with that, you know, we've held on to our forecast. We see 10-year yield ending the year at 4.35, so it's about 25 basis points lower from current levels. You know, our forecast has a bit more of a parallel move here over the next few months.
But as we move into 2027, we do look for further steepening with front-end yield leading the way lower and the long-end staying somewhat better anchored due to a lot of these sort of term premium dynamics that I discussed earlier, especially with respect to supply-demand dynamics in the market. You know, yeah, we're looking at a 4.25 at the end of the year for the 10-year, so we're not that far apart. I think both, I think we're all, I think UBS as a general is probably a little bit of an outlier on the bull side.
But we also believe that the Fed stays on hold, slows a bit into the next couple quarters as consumer demand just starts to wane a little bit after, you know, you go through some of these tax refunds and such. But I do want to ask you, are you concerned at all that doing nothing, you know, by the Fed, you know, given, you know, fixed income is forward-looking, you know, it likes to speculate, and if in fact the Fed doesn't do anything, that you sort of have that pressure on the back-end? Similar to, you know, if you look at, you know, 2024 when, you know, the Fed cut and the long-end went up.
I mean, are you, do you think that doing nothing will keep the back-end at least stable, or do you think we need, you know, five more months of data for that to happen? Well, two things. I think part of the problem, again, is a Fed that is not really explaining its thinking, right?
And so if you don't sort of provide the rationale for staying on hold and the market narrative or, you know, understanding on where the economy is differs somewhat from the Fed's own thinking, then you get that reaction of, oh, they're doing nothing, they're going to be caught behind the curve. And that certainly keeps the back-end at risk of moving higher. So, you know, we've started to see some more Fed speakers coming out here the last couple of days.
We have a number of Fed speakers lined up on the docket, and we'll be hearing more from them. So I imagine we could get a bit more sort of communication and clarification on that front. But then combined with that, we really do need to see progress in the data.
So we don't know exactly what the Fed is looking at here, right? Warsh said in the press conference last week, I don't want to reveal my cards, but I have the task force working on a data project, and presumably he is looking at a broader swath of sort of high-frequency data to measure where inflation is, right? And so if he's looking at something and the rest of the market is looking at, you know, CPI and PCE still being too high, certainly that would drive more confusion in the market.
So it's a combination of the markets being able to see the progress, the Fed explaining their thinking, and that's, I think, how you start to restore credibility. So, you know, again, our forecast is based on this idea that we will see progress in the data. And so if that's happening while the Fed, you know, remains sort of vigilant, but, you know, perhaps acts with some patience here, I think that could be an environment where we won't see long-end yields continue to climb.
But it's going to be, again, sort of that combination of the communication and clear progress in the data. So let's go back to term premium for a minute. And for those that aren't familiar, and a very, very, very simplistic, you know, explanation, term premium is just what you're compensated for by locking up your money, say, for 10 years in a 10-year treasury versus buying a one-year and rolling it over 10 times.
That is, term premium also is a little bit of a clouded number, in my opinion. I'm sure, Phoebe, you would agree. So it has a little bit of a plug into it.
But when we think about that going forward, how much of an influence do you think will, you know, we're seeing globally, right, whether it's either in Japan or in Europe or, say, the deficit, even though, I mean, you mentioned, you know, the likelihood of coupon supply increasing in 2027. You know, we think that deficit supply is more of a passenger versus a driver, such as growth and inflation. How do you see sort of those variables impacting term premium, you know, over the next six months, and what, besides materially slower growth, will get that term premium down?
So I do think that term premium in general will continue to primarily be driven by supply and demand dynamics, not just in the U.S., but globally. And so I think as I talk about sort of our fiscal outlook for the U.S., there are a lot of common themes that apply to other markets. You can think of Japan as sort of a prime example of what we've seen there over the past year.
But as we move into 2027, as I mentioned, we do think that, you know, Treasury will start increasing coupon auction sizes again. Our forecast is that those increases will come in May. And when they start increasing, we think they'll be focused in twos through tens.
We think they probably won't need to increase 20s and 30s. We've seen some indication of that in some of the recent communication from TBAC in recent quarters. You know, Treasury has leaned on this TBAC debt optimization framework.
And part of that framework argues that when term premium is moving higher, that it's an argument to focus more of your issuance in the front and through belly of the curve, right? So, they're trying to be a regular and predictable borrower, but also issuing with the least cost to the taxpayer over time, right? So, they're trying to optimize for, you know, reducing the risk associated with, you know, rolling over short-term securities, but also trying to sort of lock in the least cost over time.
So, term premium certainly plays into that. On top of that, you know, TBAC has done a number of studies looking at sort of structural demand trends and have argued that we have seen sort of reduced structural demand at the very long end of the curve. We can see, you know, somewhat slower pace of buying from the LDI community.
So, the pension funds, for example, that have been, you know, very well funded for a number of years now and have, you know, de-risked into fixed income already. So, we see demand falling there. And again, that's a theme that we can see globally, that LDI demand just kind of getting reduced in, you know, various DM bond markets.
So, while that continues to be a concern for Treasury, we think issuance will come in more front end through belly of the curve. That said, we still see duration supply of Treasury stepping up pretty materially as we move, you know, past 2027 and into 2028 in particular. We see Treasury supply and 10-year equivalence increasing by more than $400 billion to north of $3 trillion in 2028.
So, you know, even though Treasury has been able to hold off on making these increases so far and they've been leaning on, you know, bill issuance for now, I think markets are broadly aware that they can't lean on bills forever, right? There is this sort of structural deficit problem that we have in the U.S. that's not going away. We're not seeing much political will in Congress to address the problem.
And I think against the backdrop, the common theme I hear from almost every investor I speak to is just sort of this reluctance to buy, especially 30-year Treasuries. I think that, you know, Kerr-Steepener positions has been a resting position for, you know, a lot of asset managers for quite some time now. You know, there have been, you know, some times where we see that trade sort of unwound or reduced, but I think that's still a resting position in the market.
And there's just this lingering concern about the fiscal situation in the U.S., which, by the way, only gets worse as we see, you know, yields moving higher, the interest cost burden continuing to be a bigger part of the deficit for the U.S. Treasury. So, you know, this is a problem that's not going away.
And in terms of how that plays into kind of the shape of the curve going forward, you know, it certainly becomes more of an issue when it compounds with, you know, added uncertainty in terms of Fed communication or, you know, if suddenly we see growth expectations getting revised higher, right? And when many of these factors sort of happen at the same time, you can get added sort of bearish pressure at the back end of the curve. And I think of, you know, back to 2023 when we saw very aggressive curve steepening, bear steepening.
It was a time when Treasury was increasing coupon auction sizes at the time, hadn't really given an indication of how many quarters that would go on for. Growth expectations were getting revised up. You know, we had kind of other global, you know, issues outside of the U.S. compounding the problem.
But this is something that we see kind of time and again becoming a problem for the market. So, you know, I think it will remain top of mind for investors. And whether softening data and a Fed that cuts will be enough to kind of cap the long end moves.
You know, I guess it will partly depend on the speed of progress towards that 2 percent inflation goal and kind of how much overall softening we see in the real economy. So, if we think about some of those risks, you know, I want to ask, I sort of want to end here in terms of, you know, what type of risks you think the market should be paying attention to or maybe what they're paying too much attention to. I just sort of like to end with this discussion that you were just having in terms of, like, you know, when we saw that 10-year yield go to, you know, 501 a few years ago, it was because of the increased supply.
But to your point, it was also because growth came in much higher than expected. So when you think about the risks that are here now, is it, you know, people aren't going to buy the third year anymore because there's a breakdown of correlation between equity and fixed income? Is it, you know, because of just the supply?
And I know you mentioned, you know, the credit markets and, you know, even AI for that matter. How do you sort of, what risks are there to those kind of, you know, performance drivers or variables to the U.S. Treasury?
And or maybe what are people paying too much, putting too much sort of weight on certain risks, whether it's, you know, the price stability mandate, whatever it might be that really is, that has your eye in focus right now? Sure. And maybe one point I should have mentioned sort of in the previous part of this discussion as we talk about term premium, I think structurally it is headed higher, but we, again, when we think about what term premium means, it's sort of that additional compensation that investors require to be compensated for this additional risk.
And so I highlight that because I think at the end of the day, there is a clearing level, right? The risk premium needs to be somewhat higher, but I think at a certain price, we will see investors coming in, you know, certainly yields are looking more attractive at these levels. But in terms of the risks, I sort of see risks on both sides of our forecast.
Certainly there's the risk that we don't see yields coming down quite as much as we have forecast. That's coming both from sort of the real economy side in terms of, you know, could inflation actually prove stickier than we appreciate? Could we actually see labor demand proving more resilient and potentially accelerating in the second half of the year?
That's certainly a risk. Oil prices also continue to be a very important risk in this market. And I should highlight, you know, it's made it challenging to sort of make trade recommendations with high conviction when you see especially belly yields, front end to, you know, really the five-year yield is where I've seen it trading with call it a 0.9 to one beta with moves in oil.
Right. So it's really had a high correlation there and that's made it tricky in this environment. Our forecast is for Brent oil prices to average close to $80 a barrel through the end of the year.
But again, it was just a week and a half ago that we had Brent above 100. So it's not clear that we're out of the woods yet with geopolitical risks and that's certainly something to highlight. And then I think it's also worth highlighting on the AI tech side, just how dependent the U.S. growth profile continues to be on continued strength in AI.
Right. We talked briefly about the consumer before. We have seen savings rates continue to fall and it's been actually quite impressive how resilient the consumer has been, even in light of very low real disposable income growth.
Right. And wage growth continues to be quite low. And a lot of that we think has to do with the wealth effect.
Equities keep going higher, driven by the tech sector and that's, you know, helped support spending. And then away from the consumer, just what we're seeing on more of the business CapEx side, a lot of the strength is really concentrated still in the tech sector, whereas, you know, outside of that, most sectors are actually still in contraction. So there's, you know, this sort of dichotomy in the real economy.
And it, you know, makes me a little bit concerned if we do see more of a wobble in the AI trade. Certainly not our base case. But if we saw more weakness there, just how exposed the real economy is to it.
So that's something worth mentioning, especially in this environment where we have seen, you know, tech credit spreads widening out and some weakness recently. Again, not our base case is something I wanted to highlight. Okay.
So this has been, this has been a really great conversation. And first off, welcome to UBS. You know, I'm really glad that you've, you know, come on board and this is going to be one of many that I'm sure you and I will have given the uncertainty is really this has been the theme somewhat of this dialogue.
And as we have, you know, Chair Warsh going to go through some of his communication growing pains and we have Jackson Holt at the end of the end of the month. And so I'm sure we'll have a lot of conversations, you and I going forward. So I really appreciate your time and I look forward to having you back on soon.
Thanks so much, Leslie. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels along with our video offerings, such as UBS trending.
You can also follow us on Instagram for content highlights at UBS trending UBS studios is part of the UBS chief investment office within UBS global wealth management. Visit UBS.com slash CIO to view the latest research. UBS chief investment offices, investment views are prepared and published by the global wealth management business of UBS, AG or its affiliates.
The views and opinions expressed in this material by external guest speakers are those of the author speaker and are not those of UBS, its subsidiaries or affiliates. Accordingly, UBS does not accept any liability over the content of this material or any claims losses or damages arising from the use or reliance of all or any part thereof. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published for informational purposes only.
For a disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.