So what are your reflections on the quarter's performance, and how do you see the fixed income landscape evolving through year-end?

Yeah, I mean, we, we wrote a very cons-- comprehensive lead in the fixed income strategist month, this month with Optics and Opportunities.

And, you know, when we think about the third quarter and the third quarter move, it was, it was actually quite remarkable.

I mean, we, you know, at the-- around the end of June, you were four thirty-seven in ten-year yields or, you know, at some points at the end of August, you were around a four sixty-three, and then all of a sudden, we had both ten and thirty-year yields jump to the highest that we've seen since two thousand and two.

Now, as we all know, and this has been written about quite a bit, I mean, most of the increase in the nominal yields is driven by real yields, which does first and foremost indicate that growth is, is on solid footing.

And, you know, are-- we agree with that, um, you know, outlook and what we've seen in the second quarter growth and our expectations for third quarter is that, you know, growth remains on solid footing.

But, but the, the amount that the yields increased in such a short period of time, and that's one of the things that we always highlight.

Leslie, as we begin to close out, just to reinforce some guidance, as you've pointed out, with rates volatility still heightened, how should fixed income investors navigate this environment, and what are your positioning recommendations at this time?

The third quarter of 2026 will be a quarter to remember.

At the end of June, 10-year yields hovered around a 4.37%, only to find themselves near a 5.35% by the end of September.

This 100 basis point rise came in a very short period of time.

Both the 10 and 30-year Treasury yields are at levels that we haven't seen since 2002.

While most of the movement has to do with the recalibration of growth, consumer spending, and the fact that GDP is expected to be strong again in the third quarter, it still has put a weight on interest rates.

With the Fed projected to increase the Fed funds rate by about 75 to 100 basis points over the next year, we find this view a little bit hawkish.

Totally right.

They forget they had to normalize, right? And they, they think that it's gonna be sort of this trend, but not realizing that the base back then in yields was very, very low, and your starting point is much higher now.

So when it comes to like the, the Fed, um, you know, we did anticipate a hike in September.

Granted, we were a little bit late, so we kind of...

We marked to market a little bit on that one, but that was a very common.

You know, at first we didn't think they were gonna hike a couple months back.

We do think that they hike again in December.

Uh, Leslie, what's top of mind for you? What should fixed income investors be mindful of right now?

What factors, Leslie, have contributed to this movement?

Yeah, absolutely.

And, you know, uh, the media and, you know, your-- what you read, you're gonna hear multiple, multiple factors in terms of what is influencing, particularly that long end of the Treasury curve.

And, you know, and Dan, as you mentioned, we've gotten to, like, a five oh four percent last night, which is, you know, some of the highest that we've seen in ten-year Treasury yields since, since two thousand and seven.

But let's sort of, let's outline just a couple of them that are, I believe, the major drivers, okay? Let's start with, let's start on the positive side first.

And one of the major drivers why we've seen this back in the, in yield is simply because we've had pretty strong growth.

I mean, the economy has been, you know, very resilient.

Leslie, as we look ahead, what factors do you believe will shape the supply outlook over, let's say, the next year?

What's happening this time? Is it like that? Is it different? And again, should this be a cause for concern for people?

I mean, well, partly there is.

I mean, obviously what we're seeing in the Middle East is causing some – those are supply disruptions.

And as we know, a hiking Fed is not going to alleviate that kind of pressure.

But one of the things in terms of borrowing costs and one of the parts of the economy that have faced some headwinds are things such as housing, right? I mean, in the U.S., yesterday we had the 30-year mortgage rate go over 7%, 707.

That's the highest that we've been – in well over a year.

Now, as we know, a lot of these consumers have locked into mortgage rates much lower, around a 4.3, but these interest rates, the rising borrowing costs, have impacted sectors like housing, such as autos.

What's the takeaway? Do we look at, I don't know, maybe someone sitting a bit longer in cash or they're deep in their bond fund right now? Or actually, does it change what they should do? Or does everyone need to be mindful of these things?

What will the Fed be focused on near term, let's say, through the balance of twenty twenty-six? And what might these focuses or mandates of the Fed mean for the interest rate environment going forward?

Yeah, I mean, you know, one of the things that-- And we, we weren't as surprised at-- with the hawkish tone.

I think it would-- I think there would have cred-- been a credibility issue there if he would've come across a little bit too dovish.

Um, I do think this hawkish tone sort of stays in play, however.

Because when you have a hawkish tone, what that does, Dan, is that inflation expectations in the long end stay anchored or actually come down.

Um, and that's really what sort of, in a sense, the market is looking for.

And you're seeing this, by the way, through re-real yields.

In terms of performance expectations, Leslie, if we now turn to the second-half outlook portion of our conversation, uh, talk to us a bit about the factors that will drive return in the second half and anything top of mind that could perhaps spark volatility that you're being mindful of.

Leslie Falconio is head of fixed income strategy at UBS Wealth Management.

pension funds, insurance companies, asset liabilities manager, you know, they love these yields that we're seeing.

So what factors have driven this movement?

Yeah, I mean, you know, it's incredible when you think about it, Dan, because when we every day there's this, you know, different rhetoric in terms of how long this quote-unquote ceasefire is actually going to last.

Unfortunately, the market is at the whim of that dialogue until there's actually something signed.

Some of the factors that we were seeing in terms of the rise in rates, first off, the economy is incredibly resilient.

We know that retail sales, ISM, the recent payroll numbers have all been strong, and I think they surprise to the upside.

We also know, as expected, that inflation is still lingering, as we see from that CPI report.

But the question is whether or not it has actually peaked.

Can you walk our listeners through these changes?

So what factors have driven this movement?

Yeah, I mean, you know, it's, it's incredible when you think about it, Dan, because when we-- every day there's this, you know, different rhetoric in terms of how long this, you know, quote, unquote, "ceasefire" is actually going to last.

And unfortunately, the market is at the whim of that dialogue until there's actually something signed.

So I mean, some of the factors that we're seeing in terms of the rise in rates, you know, first off, the economy is, you know, is incredibly resilient, right? We, we know that retail sales, ISM, you know, the recent payroll numbers have all been, you know, strong, and I think they surprised to the upside.

We also know, as expected, that inflation, um, is still lingering, as we see from that CPI report, but the question is whether or not it has actually peaked.

So while all of those have been drivers, the main driver of why interest rates, particularly that tenure, was rising is because the market is repricing the Fed path.

And while in March, when the initial conflict started, they might, might have taken out the cuts that were at the end of February, they had yet to become real-- the markets really wasn't that hawkish, where they were pricing in actual hikes.

Can you walk our listeners through these changes?

So can you share with us your reflections on overall Q1 performance for fixed income and maybe share with us performance expectations through the first half of 2026? Yeah,

absolutely.

I mean, we titled the Fixed Income Strategist Shifting Gears.

We did that for a reason.

I mean, when we think about the first three months of of 2026 since it shifted you know multiple times during that three-month period and you know not just coming into january out of the gate where you know risk assets equity gold you know most sectors had performed incredibly well only to you know sort of shift down in february as concerns over private credit ai disruption expectations of slower growth pushed that 10-year treasury yield in February down to around that 395 area.

And actually, as a result, the market was forecasting about around 60 basis points of cut for 2026.

Now, as we went into March, lo and behold, gears shifted again as that Middle East crisis really came on very quickly.

What is CIO currently recommending? What was outlined in the latest FIS, Leslie?

So can you share with us your reflections on overall Q1 performance for fixed income and, uh, maybe share with us performance expectations through the first half of twenty twenty-six?

Yeah, absolutely.

I mean, we titled the Fixed Income Strategist Shifting Gears, and we did that for a reason.

I mean, when we think about the first three months of twenty twenty-six, sentiment shifted, you know, multiple times during that three-month period.

And, you know, not just coming into January out of the gate where, you know, risk assets, equity, gold, you know, most sectors had performed incredibly well, only to, you know, sort of s-shift down in February as concerns over private credit, AI disruption, expectations of slower growth, um, you know, pushed that ten-year Treasury yield in February down to around that three ninety-five area.

And actually, as a result, the market was forecasting about around sixty basis points of cuts for twenty twenty-six.

Now, as we went into March, lo and behold, gears shifted again as that Middle East, you know, crisis really came on very quickly, and the market shift in terms of future expectations occurred very quickly.

What is CIO currently recommending? What was outlined in the latest FS, Leslie?

And, you know, we hope for a recovery in the coming quarters.

Yeah, I mean, that's something I always explain to our investors who do the agency MDF5.

You know, we know that's just the short volatility.

But really, with most products, when you have that delta, that change in yield of 50 basis points, say, or around that, you know, we ended at the end of February, remember, we were about a 395.

The mark was pricing in, you know, about 60 basis points of cuts.

We had all this AI disruption really leading the headline.

And everyone was, oh, my gosh, slower growth.

There's a fair amount of uncertainty, but, uh, realizing price hikes in the US seems, uh, less likely.

Can you provide us with a brief fixed-income market update and outlook against that geopolitical backdrop?

Yeah, absolutely.

Thank you, Dan.

I mean, you know, one of the things that we always say within the fixed-income market, which is forward-looking – that it's not necessarily the absolute level, but it's more importantly how quickly you get there.

So in other words, when the market sees such large changes in a short period of time, you have volatility rise and then you have headwinds, the fixed income market.

And I can't think of, you know, another time, at least in the recent period, maybe during about a year ago or so, that we've seen this kind of, I wouldn't say delta or change.

And what I mean by that is if we look at how fixed income ended the end of February and This was during a time where we were concerned about AI disruptions, there was credit issues, and the market was really looking forward and saying, you know what, growth might actually slow down.

What is CIO currently recommending?

They have been disruptive to global financial markets, though can you provide us with a brief fixed income market update and outlook against that geopolitical backdrop?

Yeah, absolutely.

Thank you, Dan.

I mean, you know, one of the things that we always say within the fixed income market, which is forward-looking, that it's not necessarily the absolute level, um, but it's more importantly how quickly you get there.

So in other words, when the market sees such large changes in a short period of time, you have volatility rise, and then you have headwinds to fixed income market.

And I can't think of, you know, another time, at least in the recent period, maybe during about a year ago or so, that we've seen this kind of, I would say, delta or change.

And what I mean by that is if we look at how fixed income ended the end of February, this was during a time where we were concerned about, you know, AI disruptions, there was credit issues, and the market was really looking forward and saying, "You know what? Growth might actually slow down." And as a result, they priced in sixty basis points of cuts in twenty twenty-six.

In terms of positioning, what is CIO currently recommending?

What factors, Leslie, and developments drove fixed income sector performance over the past month?

Yeah, I mean, you know, it's, it's what a month it definitely has been.

I mean, we have, you know, the ten-year treasury yield at around the three ninety-seven this morning.

You know, the ten-year yield has fallen over twenty-five, twenty-six basis points this month, which really it's, it's actually the largest decline that we've seen in over a year.

And I know that seems hard to believe given all the, you know, political, geopolitical, you know, fundamental, you know, monetary policy type of, uh, drivers that have faced the market over the past year.

But frankly, most months have been you kind of, you know, go down in yield, then you go back up, or you go up and you go down.

The net change really hasn't been that much.

So with those performance drivers in mind, Leslie, what is CIO's current guidance, recommendations for fixed income investors when it comes to positioning?

But how are you thinking about that making its way through the market?

Well, you've been wrong.

And, you know, I've spoken to you about this before.

We've loved agency MBS as a sector to invest in.

They're definitely cheap.

They've been cheap to corporates.

You know, I think this is a great move by the administration to get GSEs to buy.

I mean, as an investor at this point, do you have to try to then maybe theorize to some extent about what may be coming down the pike on that front and get ahead of it?

It seems like the market was caught a little bit off guard by Powell's comments, even though the folks we've been talking to in the past few weeks have said, no data, no cut.

Yeah, there's no question.

I mean, I would say it caught very off guard.

And when you think about what was priced in for the December cut, it was almost 100%, you know, prior to his, you know, testimony.

And as we know, when he said that December is not a foregone conclusion, you know, that was in his written script.

So I think the market really was not expecting to see that.

They also weren't expecting to see, you know, a descent on the dove and a descent on the hawk.

So is that just a fog issue or a lack of data issue? Or do you think it's a more fundamental issue that would lead them not to cut as much?

Is it because of policy, though, back to John's question, or is it because just there is more momentum in the underlying economy than a lot of people expected before December of last year?

Well, listen, there's definitely more momentum.

If you look at some of these GDP growth numbers, if you look at consumer spending in the fourth quarter, Even the first quarter, Atlanta Fed now is at like 2.8%.

And the labor market remains strong.

So there is obviously growth has been much stronger than anticipated.

But I think when people say the Fed is on hold, that's pricing in the marketplace.

I mean, the market this morning is only pricing in about 30, 35 basis points of cuts for 2025.

Do you reject that narrative, that scenario?