Oct 18, 2026 · 16 min
Fixed income weakness tests investors’ discipline
Top of the Morning: Fixed Income Strategist - Optics and opportunities
The episode separates genuine deterioration from valuation normalization and examines how elevated rate volatility changes fixed income positioning.
- 1Credit spread widening largely reflects normalization from exceptionally tight levels, alongside higher volatility and shifting investor sentiment.
- 2Agency mortgage-backed securities faced pressure as rate volatility rose, despite strong prior performance, attractive carry, and sound fundamentals.
- 3Historically high yields provide a cushion, but investors still need discipline and selectivity across rates and fixed income sectors.
Don't miss
Leslie Falcone reframes widening credit spreads as largely a normalization from exceptionally tight valuations rather than an outright market breakdown.
The brief
UBS host Dan Cassidy speaks with Leslie Falcone, head of Taxable Fixed Income Strategy at UBS, about a turbulent third quarter for bonds and the road ahead.
Treasury yields moved sharply, credit spreads widened, and agency mortgage-backed securities suffered their weakest month since 2022 as rate volatility intensified.
Falcone argues that much of the credit-market weakness reflects normalization from unusually tight valuations, though changing sentiment and volatility still matter.
Agency MBS had benefited from strong performance and carry before higher rate volatility exposed its sensitivity, putting renewed focus on underlying fundamentals.
The central positioning lesson is measured rather than defensive: elevated yields offer a cushion, but opportunities require discipline and selectivity across sectors.
What was said on this episode
11 statements · 5 positive · 4 negative · 2 mixed
Economic growth remains solid through the third quarter
“growth remains on solid footing”
Listen at 1:55
Markets price a more hawkish Federal Reserve path than UBS expects
“the market is pricing in, in our opinion, a more hawkish Fed path than we are”
Listen at 2:14
UBS expects two more hikes and possible rate cuts in late 2027
“we're looking for another two and a potential, high potential, that they begin to cut in the latter part of 2027”
Listen at 2:27
Supply-driven inflation concerns will fade
“supply-driven inflation concerns. are going to fade, which we do believe they will”
Listen at 3:04
Investors should gradually add interest-rate risk as yields rise
“we still think it's a good idea and prudent to start sort of average costing and adding on to that industry at risk”
Listen at 4:48
UBS prefers short-maturity Treasury exposure
“we like to stay in the short end of the part of the curve with the Treasury side”
Listen at 5:23
UBS favors high-quality fixed-income assets with five-to-seven-year maturities
“we're mainly in the high-quality sector in that five- to seven-year area”
Listen at 5:38
Treasury yields are expected to trend lower through year-end and 2027
“we do look for yields. to trend lower into year end. And during 2027”
Listen at 5:41
Economic growth is expected to slow somewhat during 2027
“growth start to slow a little bit”
Listen at 5:48
Fixed-income market volatility will continue
“you're going to see volatility”
Listen at 5:55
Yields will rise again, creating opportunities to add exposure
“you wait for the right opportunity in terms of when those yields start to rise, which they will again”
Listen at 5:58
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
Weekly email
State of the Pod, every Monday
The week's most-discussed names and stories from podcasts, with the moments behind them. Free, five minutes, unsubscribe in one click.