UBS Global Wealth Management now expects the Federal Reserve to raise interest rates twice before the end of 2026, a sharp reversal from its previous forecast that the central bank would keep rates unchanged through the year. Kurt Reiman, the firm’s Head of Fixed Income Americas, says higher bond yields are being driven by multiple forces, not just ballooning deficits.
The call is striking because UBS had previously expected the Fed to either hold steady or ease later in 2026. Instead, the firm now sees two 25-basis-point hikes landing at the September 15-16 meeting and again in December, which would push the federal funds target range up to 4.00-4.25%.
What changed the math
Two data points appear to have forced UBS’s hand. August nonfarm payrolls came in at 162,000, roughly triple the consensus estimate of around 55,000 to 56,000. The unemployment rate, meanwhile, held steady at 4.1% in August.
Then there’s inflation. July’s Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, clocked in at 3.7% year-over-year. That’s well above the 2% target the Fed has been chasing for years, and it gives Chair Kevin Warsh plenty of cover to stay hawkish. Warsh’s remarks at the Jackson Hole symposium reinforced the message: rate relief isn’t coming anytime soon.
Reiman emphasized that rising bond yields reflect “definitely not just the deficit” but a broader cocktail of factors.
How UBS is repositioning its yield forecasts
The rate hike expectations come with substantial revisions to UBS’s Treasury yield projections. The firm has raised its two-year Treasury yield forecast by a full 100 basis points, now targeting 4.25% by June 2027. The 10-year yield forecast got a 40-basis-point bump to 4.5% over the same period.
UBS is advising clients to maintain diversification and rebalance toward long-term targets rather than making dramatic moves in either direction.
What this means for markets
UBS maintains what it calls a “cautiously optimistic” outlook for global equities, but the qualifier matters. Rate hikes create headwinds for stocks in several ways. Higher borrowing costs squeeze corporate margins, especially for heavily leveraged companies. They also raise the discount rate on future earnings, which hits growth stocks hardest because more of their value sits in distant cash flows.
Despite the near-term turbulence, UBS sees opportunity in medium- to longer-maturity high-quality bonds. The key is being selective about credit quality and duration, rather than reaching for yield in riskier corners of the market.