Latest / UBS Trending / Where to find stability in uncertainty

Transcript

Where to find stability in uncertainty · UBS Trending

• 0:00
  Markets have been on the move volatility,
• 0:03
  shifting, fed expectations and big moves in fixed income.
• 0:06
  As we wrap up the first quarter.
• 0:08
  What drove performance and how should investors position
• 0:11
  for what's coming next?
• 0:12
  We're going to break it all down for you right now.
• 0:14
  On UBS Trending.
• 0:26
  Hi everybody and welcome to UBS Trending. I'm Anthony Pastore.
• 0:29
  Thanks so much for sitting with us today.
• 0:31
  Leslie Falconio is back in the studio with me.
• 0:34
  Leslie, I'm going to put you to the task today
• 0:36
  because there's so much happening
• 0:38
  in the world of the markets, but drilling it into fixed income.
• 0:41
  How's the first three months been for you?
• 0:43
  Because, boy, what a head spinner it's been crazy.
• 0:45
  Volatility. Lots of uncertainty.
• 0:47
  What have you seen.
• 0:48
  You know in
• 0:50
  what you just said is so true
• 0:51
  when you think about the first three months of the year.
• 0:53
  First of all let's talk about really quickly how we entered 2026.
• 0:56
  Right.
• 0:57
  Slower but stable growth strong consumer.
• 0:59
  You know household balance sheets were strong.
• 1:01
  Wage growth was, you know, stable to slightly higher.
• 1:05
  And you had January performance
• 1:06
  where you really started to break all these records. Right.
• 1:08
  Spreads are tighter. Goal was up.
• 1:10
  It was really one of those Goldilocks on steroids
• 1:13
  kind of environment.
• 1:14
  You go to February right.
• 1:16
  The sentiment completely shifts.
• 1:18
  We have AI disruption
• 1:20
  you know, potentially leading to job losses.
• 1:23
  You have private credit concerns.
• 1:25
  And then all of a sudden we focus on the slower growth outlook,
• 1:28
  which took the market to say, okay, ten go down to 3.95.
• 1:32
  We have three cuts
• 1:33
  that they thought priced in
• 1:34
  for the year in 2026, at the end of February, to shift again
• 1:38
  once again
• 1:39
  in the first, you know, in March,
• 1:40
  as we focus on the conflict in the Middle East,
• 1:43
  then the concern overgrowth takes the back seat.
• 1:46
  Everyone focuses on inflation.
• 1:48
  You know,
• 1:49
  whether or not that's good
• 1:50
  has what the duration of the crisis is going to be,
• 1:52
  whether or not it's
• 1:53
  going to impact the household purchasing power in the long term.
• 1:56
  So inflation became the component.
• 1:58
  Those those cuts are removed and interest rates move higher.
• 2:02
  So it's really bad when you think about just three months
• 2:05
  you've had several different mini cycles
• 2:08
  in a three month time period.
• 2:10
  Yeah.
• 2:10
  It's you know, the big question
• 2:12
  and I think,
• 2:13
  you know, you sitting as a, as a fixed income professional here,
• 2:16
  you have to wonder what the fed is thinking. Right.
• 2:19
  And I know that right now the CIO,
• 2:20
  our Chief Investment Office here,
• 2:22
  we we think that the fed is going to still cut twice
• 2:26
  this year
• 2:26
  towards the back of the year,
• 2:28
  though this time we're kind of pushing it down the road
• 2:30
  a little bit.
• 2:30
  50 basis points
• 2:31
  in total between the two is what the thought process here.
• 2:34
  So the question then is with potential spikes of inflation
• 2:38
  now it could be short term.
• 2:40
  We don't know how much longer the conflict is going to last.
• 2:42
  But certainly inflation is going to go up this month.
• 2:47
  The fed then
• 2:47
  has to make a decision
• 2:48
  about what they're going to do
• 2:50
  as we see job growth slowing down a little bit.
• 2:54
  What's the what does the fed need to do here right now.
• 2:57
  Nothing. And I'll tell you the reason why.
• 2:59
  That's the best answer you could have said.
• 3:00
  Because look the the
• 3:02
  we have CPI coming up
• 3:03
  and we know that
• 3:04
  there's going to be inflation numbers
• 3:05
  that we're going to see that will most likely be on an uptrend.
• 3:08
  We know that we are still feeling a bit of headwinds if you will,
• 3:13
  because we had core goods inflation that was still trending above
• 3:16
  what the Fed's target would like to see.
• 3:19
  But again,
• 3:20
  when we look at the curve
• 3:21
  and we look at what's happening right now okay,
• 3:23
  most of these inflation expectations as you pointed out,
• 3:26
  they're actually in the short end. Right.
• 3:28
  The longer term inflation expectation
• 3:30
  and what the fed really monitors right. Their tenure.
• 3:33
  You haven't seen a large spike.
• 3:34
  So what this is saying
• 3:35
  is the market saying
• 3:37
  yes inflation is going to be go higher as we have
• 3:40
  you know obviously oil prices up and you know
• 3:43
  for longer than what people originally anticipated.
• 3:46
  And not only that, that floor
• 3:48
  that we once saw
• 3:48
  in oil
• 3:49
  is going to be higher
• 3:50
  even after a resolution, you know, comes to mind.
• 3:53
  But still,
• 3:54
  you don't have that back end really saying
• 3:55
  there's going to be a lot of inflation.
• 3:57
  What that means is that more than likely this would be, you know,
• 4:00
  a temporary, if you will, you know, hit a temporary headwind.
• 4:04
  And so therefore, you know, the
• 4:05
  the fed is the best thing to do for them is to stay right
• 4:08
  now, particularly given the unemployed report that we just saw
• 4:11
  on Friday. Right?
• 4:12
  I mean, 4.3 unemployment rate from 173 K.
• 4:16
  You know, in terms of jobs,
• 4:17
  you know,
• 4:17
  that was something that was, you know, an unexpected surprise.
• 4:22
  And I just think really solidifies
• 4:24
  the fact that the fed is going to be on hold for a while.
• 4:26
  Yeah. Yeah, yeah. That's great.
• 4:27
  You said because even Powell himself
• 4:29
  recently when questioned
• 4:30
  he said we're in a wait and see approach right now.
• 4:33
  And obviously he agrees with you.
• 4:36
  He should call you and ask what you think.
• 4:38
  So thank you, les, I appreciate that.
• 4:39
  But, you know,
• 4:40
  let's step back a little bit
• 4:41
  because when you look at yields,
• 4:42
  when you look at spreads, when you look at flows,
• 4:44
  how have the fixed income markets been reacting to the volatility
• 4:48
  that we've seen
• 4:48
  and specifically the uncertainty
• 4:50
  that's that's out there right now for investors?
• 4:52
  Yeah.
• 4:53
  Listen, we are all subject to regardless
• 4:55
  what asset class that you hold subject to geopolitical website.
• 4:58
  Okay.
• 4:59
  And here's the fed as we talk about non-farm payroll.
• 5:02
  That's kind of historical data right.
• 5:04
  So it's really tough.
• 5:05
  And and fixed income investors in particular
• 5:08
  that are coming from historically low volatility.
• 5:11
  Right.
• 5:11
  And and I would say somewhat of a complacent attitude
• 5:15
  heading into 2026.
• 5:17
  You know, now that we have this kind of volatility
• 5:19
  that we're seeing,
• 5:20
  they really need to sort of decipher
• 5:22
  between, okay, the economic data and geopolitical whipsaw,
• 5:26
  and you don't want to be whipsawed. Right.
• 5:27
  So when we think about the fixed income and as a whole,
• 5:32
  of course,
• 5:33
  when you have this kind of volatility in the short term
• 5:36
  when interest rates move up, you know, 40 basis points,
• 5:39
  not over a three month period, but over a three week period.
• 5:42
  Everyone says, okay, risk off right and spreads wide.
• 5:44
  Now that's just it's the nature that we've always seen.
• 5:48
  But you know, with the spread widening
• 5:49
  part of it is not necessarily what was the headwind
• 5:52
  a total return in March.
• 5:53
  It was really the fact that interest rates moved higher. Yeah.
• 5:56
  And in fact, I would actually argue, given the fact of coming
• 6:00
  from some of the credit, you know, headlines
• 6:05
  that we saw in February
• 6:06
  from AI, from software, from private credit,
• 6:10
  you know, and going into immediately
• 6:11
  this kind of volatility,
• 6:12
  I would say actually
• 6:13
  credit spreads have actually done quite well.
• 6:16
  Yes.
• 6:17
  Why not a little bit in the high yield side.
• 6:18
  And Anthony, as you know, we prefer higher quality.
• 6:21
  The the investment grade corporate market had first quarter,
• 6:25
  you know, about 650 billion.
• 6:26
  And supply hit the market.
• 6:28
  There was just as much investor demand on the other side.
• 6:31
  The widening that we've seen is really not material
• 6:34
  because investors want to buy that yield. Right.
• 6:35
  Because normally when you say
• 6:37
  credit spreads are widening, immediately you go to, oh, you know,
• 6:40
  investors are,
• 6:41
  you know, looking out for all this risk that might be happening.
• 6:44
  They're looking at more options.
• 6:45
  So but you're not saying that
• 6:47
  that's what this indicates this time that the spreads aren't
• 6:50
  so wide that you're like okay now we're in a risk on environment.
• 6:53
  No.
• 6:53
  Because you have to remember we're coming from we get
• 6:55
  what was that base?
• 6:56
  That base was historically tight spreads.
• 6:58
  Right? Right.
• 6:59
  So when do you widen 30 basis points from historically
• 7:02
  tight spreads.
• 7:04
  You're still in the historically tight.
• 7:06
  That's right, that's right.
• 7:07
  So all those spreads avoid never have probably 33 or 5 wider
• 7:10
  which is really not
• 7:11
  that much given the volatility that we've seen.
• 7:15
  But of course there's going to be dislocations.
• 7:17
  You have to you have to absolutely pick your spots.
• 7:20
  And you know
• 7:21
  as you know, we still are number one preferring that high quality
• 7:25
  because I can get much more compounding income and higher
• 7:28
  quality than there's no need for us to go really that below
• 7:31
  the really deep down a credit right here
• 7:33
  because we don't know what's going to happen,
• 7:34
  how long it's going to last. Right.
• 7:35
  Whether or not, you know, growth
• 7:37
  turns and slows because of household purchasing power declining.
• 7:41
  And that's really where we've been positioned
• 7:42
  in terms of that just compounding that income for a high quality.
• 7:44
  Right.
• 7:45
  And it's not the first time
• 7:45
  we're dealing with, you know,
• 7:47
  credit spreads widening and rates spiking.
• 7:50
  We sat down in October of 2024 when the ten year hit.
• 7:53
  These multi-year
• 7:54
  highs on the yield and so, you know,
• 7:56
  we're still way off of those levels.
• 7:57
  It was above 5% I think at that point, if I remember correctly.
• 8:00
  So I'm saying this is not a market that you haven't seen before.
• 8:03
  That's that's absolutely right.
• 8:05
  I mean, I think I think what makes this different
• 8:06
  in mid-October 2024? You're right.
• 8:08
  I'm glad
• 8:08
  that you brought that up, because the Treasury index in March
• 8:12
  had its worst performance since October 2024, right.
• 8:16
  So and again, it's not just what the absolute yield level is,
• 8:20
  but it's that change, right.
• 8:22
  That that's really that really makes a difference in terms
• 8:24
  ahead of interest rates.
• 8:25
  But you like treasuries right.
• 8:26
  You moved it to attractive in the last couple of weeks.
• 8:29
  And you still also like agency mortgage backed securities.
• 8:31
  And even with 30 year mortgage rates now getting to around 6.5%,
• 8:36
  still off of the very high levels
• 8:37
  we saw last year, but a little bit higher than where they were.
• 8:40
  So talk about.
• 8:41
  Those positions we took with us.
• 8:43
  We've and even the coming into the beginning of the year,
• 8:45
  we sort of set this band that we felt,
• 8:49
  the ten year would
• 8:50
  stay between
• 8:51
  maybe four to say four and a half ish right around those levels
• 8:55
  for a sustained period of time. Right.
• 8:56
  You know,
• 8:57
  you know, after
• 8:58
  we had this announcement or this, you know, conflict occurred,
• 9:01
  a couple weeks went by,
• 9:02
  we kind of
• 9:03
  went to that for 48
• 9:04
  and kind of went right back down again in tens.
• 9:06
  But more importantly,
• 9:07
  the market was pricing out
• 9:09
  the cuts that they had put in in February.
• 9:11
  You know, as a result,
• 9:12
  we have a big rise in that short part of the yield curve.
• 9:14
  And our point was and our positioning was, you know, what?
• 9:18
  We do believe two cuts, you know, we do we don't believe that.
• 9:22
  You know, the fed is going to hike,
• 9:24
  which is they're actually still pricing in anytime
• 9:26
  the near future.
• 9:28
  You know, we our view on the fed was it was delayed not derailed.
• 9:33
  You'd still have these cuts.
• 9:34
  So as interest rates moved higher,
• 9:35
  we actually did move to a much preferred treasuries
• 9:38
  in that
• 9:39
  2 to 5 year the curve,
• 9:40
  simply because we liked that compounding income there.
• 9:43
  You're not going too far over your skis on interest rate risk.
• 9:46
  And that back end.
• 9:47
  You still have uncertainty whether it's inflation, whether it's
• 9:51
  the deficit and bond vigilantes once again rears the head.
• 9:54
  And just a lot of volatility
• 9:55
  that we just simply don't want to take. Right.
• 9:57
  And part of the mortgage backed securities side is actually,
• 9:59
  you know,
• 10:00
  we've run a balanced portfolio within the fixed income side,
• 10:03
  meaning that we have high quality.
• 10:04
  But it's going to be the corporates
• 10:06
  and the securitized products agency MBS have done,
• 10:10
  you know, they we ended February to 5.98, 30 year mortgage rate.
• 10:14
  We got up to about 640.
• 10:16
  Yes. MBS widened out.
• 10:18
  But in terms of overall positioning
• 10:20
  and definitely diversification,
• 10:22
  you know, they were the one of the best performers in 2025.
• 10:24
  We think they're going to do well in 2026.
• 10:26
  I mean as you know affordability is a big issue.
• 10:28
  Yeah we think they're a little bit too wide here.
• 10:30
  If you already own the we'd actually increase the allocation.
• 10:33
  There are high quality and you have 510, 520
• 10:37
  and compounding income.
• 10:38
  Excellent. Leslie, thank you very much.
• 10:39
  Thank you.
• 10:39
  Always a lot to get to when you come through the door.
• 10:41
  So thanks for joining us.
• 10:43
  Good to see you.
• 10:43
  Leslie Falconio from the Chief Investment Office.
• 10:45
  And thank you all for being here as well.
• 10:47
  Make sure to check out more content
• 10:49
  coming out of the Chief Investment Office,
• 10:51
  including our very own Leslie Falconio, at our insights website.
• 10:54
  Ubs.com/views.
• 10:56
  Plus you can follow us on social media.
• 10:57
  We're on LinkedIn and Facebook plus the studio.
• 11:00
  We have our own Instagram channel at UBS Trending.
• 11:02
  So give us a follow there.
• 11:03
  And as always,
• 11:04
  if you have any questions
• 11:05
  about what
• 11:06
  Leslie and I spoke about today, please
• 11:08
  make sure you continuing this conversation
• 11:10
  with your financial advisors.
• 11:11
  Until next time, I'm Anthony Pastore.
• 11:12
  Have a great rest of your day everybody,
• 11:14
  and remember to keep your eyes on what's trending.
• 11:16
  We'll see you soon.