UBS Fixed Income-Global Rates Strategy _2026 Rates Outlook - Reality checks o...-118900026

ab17 November 2025Global ResearchGlobal Rates Strategy2026 Rates Outlook - Reality checks on AI and German stimulusGlobal economy - A year of two halves UBS thinks that the global economy will navigate a soft patch in the next 4-5 months, with tariffs still feeding through to prices (the US) and exports (globally). But growth would accelerate later in 2026. Business and consumer confidence has improved, and the global credit impulse has turned positive. The global fiscal impulse is roughly flat but we expect China, the euro area, and Japan to see some additional fiscal stimulus. We see some fiscal consolidation in the US as its tariff revenue improves its cyclically adjusted primary. Excluding tariff revenue, the OBBBA provides about 40 bps of growth support (see essay 9 in global outlook). US - A round trip on US 10y UBS economists argue that the US outlook looks like "a big bet on AI." To sustain its contribution to US growth, tech investment would need to nearly triple by 2028 (see essay 4). Following a soft patch, UBS expects US growth to struggle to rise above 2% annualized in the year ahead. We see the Fed cutting rates to neutral, pretty much in line with market expectations in the year ahead. 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. Treasuries have performed when data points to cyclical weakness or when equity markets wobble. US 10y yields declined by18 bps and 12 bps following disappointing job releases in July and August, respectively. Concerns regarding equity market valuations have also become more pronounced. The UBS Speculative Growth basket (ticker "UBXXSPEC" on Bloomberg) is still up 48% year-to-date but fell 25% just this month. Reduced rates volatility continues to support long positions in fixed income.We expect renewed balance sheet expansion by the Fed and increased issuance of T-bills to limit the pick-up in duration until 2027. However, rising US debt will likely mean that investors continue to demand a higher term premium to invest in longer-term treasuries, and we expect the curve to steepens again later in 2026. We have been long 30y US vs SOFR after April's spike in yields. We expect 30y US vs SOFR to settle below 70 bps, but we are getting closer to the end of that trade. AI-related borrowing by hyperscalers could be another focal point in 2026. Top hyperscalers have been burning through their cash at a significantly higher rate, but our equity colleagues think that they could increase aggregate spending by another 38% until they finance out of debt using 2025 numbers and c35% using 2026 numbers. Thus, there remains some runway on funding, certainly compared to ’26 consensus expectations for capex of around $634bn (for more see essay 4 on the US tech cycle). Euro area - Getting to 3% on 10y bunds in late 2026 We continue to argue in favour of a J-curve for bund yields in response to Germany's fiscal regime shift. We expect 10y German