UBS Fixed Income-Global Rates Strategy _Rates Map - The labour market is the ...-118815287

ab11 November 2025Global ResearchGlobal Rates StrategyRates Map - The labour market is the rates market New trades are receiving December FOMC and ESTR 2y1y. We otherwise stay long US 10y, 30y SOFR spreads, EU 10y and Italy 30y. In curves we are holding a SOFR 2s5s steepener and EUR 10s30s steepener. Top trades in the UBS 2026 outlook published yesterday are long US 10y, Long 30y Italy vs Germany, long UK 30y, and Pay JPY 10y.Pricing US labour market weakness firstIn recent years, US job releases have been a persistent driver in rates markets (see Figure 6). 1NFP releases have been associated with lower 10y rates in 2025, in a reversal of what happened in previous years. US CPI for October may not be published at all but expectations are that the September jobs report could arrive pretty quickly after the US government reopens. UBS economists think that jobs data could still be decent in September but warn that “across the surveys, measures and details labor demand appeared to have slowed sharply and by more than labor supply.” UBS economics expects the Fed to cut 25 bps and we see value in receiving Dec FOMC even at 16 bps. In a break from previous patterns from FOMC meeting windows, the Fed delivered a hawkish cut in October and prompted a sell-off in US 10y, but we think that the tone may shift if we see persistent job market weakness (Figure 4).The big picture for the year aheadWe see the Fed cutting rates to neutral pretty much in line with market expectations in the year ahead. As discussed in the UBS outlook, we see greater value in duration than in the very front end as we expect equity volatility to rise. The UBS Speculative Growth basket (ticker "UBXXSPEC" on Bloomberg) is still up 74% year-to-date but fell 9% in the past week. The outlook for AI revenue growth and circularity have become conversation starters, unsurprisingly maybe given that nine companies have added 21% of GDP (roughly $6tn) to US market cap over the last 12 months (Figure 2). In addition, renewed balance sheet expansion from the Fed and higher issuance of T-bills should limit the pick-up of duration till 2027. However, rising US debt will likely mean that investors continue to demand a higher term premium to invest in longer-term treasuries, and the curve steepens again later in 2026. After a dip to 3.5% in the first quarter of 2026, we see the US 10y completing a round trip to 4% by the end of 2026.The link between term premia and policy ratesSteepening beyond what is priced in markets would require a more aggressive Fed easing cycle than UBS expects. The story in 2025 was also that expectations of a lower policy rate have compensated for an increase in term premia. Term premia are the excess return earned from holding longer-dated bonds versus rolling short-term bonds. If term premia are persistently higher, policy rates will need to be lower or financial conditions could be too tight. Japan is a noticeable exception to the shift lower in average expecte