In its midyear outlook for the fixed income market, UBS struck a bullish tone on mortgage-backed securities (MBS) but sees most of the fixed income market staying within the range from the first half of the year.

It believes the Fed will keep hiking rates until a terminal rate of 6% given the resilience of the economy. It ascribes the recent weakness in fixed income as a result of the market calibrating to this new reality rather than a recession in the second-half of the year.

Therefore, the market consensus that 2023 would be the year of fixed income has proven to be incorrect. Until the Fed begins cutting rates, fixed income markets face a significant headwind especially shorter-duration notes. Still, UBS remains cautious that as savings get depleted, higher rates could start to eat into consumer spending and other forms of economic activity. 

Given this challenging environment, UBS recommends MBS given the underlying strength of the housing market which has remained stable due to low supply and demand driven by demographics despite substantially higher mortgage rates. 

Finsum: UBS shared its midyear outlook for the fixed income market. It shared its economic outlook and why it’s bullish on MBS.