we are back now to continue with our cio fixed income roundtable podcast series which is part of the ubs market moves podcast channel every couple of months we do look forward to hearing from the cio fixed income team for a performance update and outlook as well as positioning considerations across fixed income subsectors. For today's episode, glad to be joined by Sadeep Merkurji, Lenny Zemedis, Sangeeta Marfadia, as well as Frank Saleo, though leading our roundtable conversation today. Glad to have back with us head of taxable fixed income strategy for the Americas from UBS CIO, Leslie Falconio. So with that, Leslie, let me now turn it over to you to lead today's roundtable. Welcome back. Thank you, Dan. I appreciate it. And, And, you know, every time we've been somewhat fortunate that every time we do these roundtables, we have these sort of bouts of volatility. And this time is not any different. So all I have to say is, here we go again. You know, as we know, we've had an increase in the Middle East conflict over the weekend and over the past couple of weeks, which has, although added some volatility into the markets, I have to say our outlook is pretty much the same in that, you know, we do believe in staying diversified. We do believe that the Fed stays on hold for 2026, likely to cut in 2027. But more importantly, when we think about positioning in fixed income, duration is cheap to spread. There's no question. What you're going to hear from our esteemed colleagues and our experts on this call is that over and over again, I'm sure that spreads are rich. However, that does not mean that you don't have opportunities for total return within fixed income. We absolutely do. But one of the things on the duration side is that duration, we think, is cheap in the fact that interest rate levels remain high. But we're staying with that two to five year area of the curve. But one of the things I think are more important, and we absolutely saw this this week, is that the market is still going to have this sort of fits and starts. For example, if I look at Monday of this week, which this podcast is on July 16th, but on Monday of this week, the market was pricing in a 50%, 50%, a coin flip, probability that the Fed would hike in July. And this was stemming from not just from the conflicts that happened over the weekend, but also some comments about Waller, which I believe was misinterpreted. But also, it was just the fact that everyone's viewing our new chair as someone who's going to be incredibly hawkish. Now, since that time, I think we've had some relief, if you will. We've had two inflation reports. The CPI was obviously much lower than what was expected. We know energy was a big component of that. But we still have sticky inflation. But the fact is the trend is moving lower. More importantly, I do think that people have a clear picture in terms of, although he didn't say very much, Chair Worsh in his two-day testimony, I think they have more of a comfort that it's not going to be necessarily this ultimately hawkish overtone price stability is obviously the key focus of his mandate, but that does not mean that he's going to necessarily be on this continuous hiking path. And since we've had this relief in some of his inflation numbers, we now only have an 8% hike of July. We now only have one hike in December of 2026. Then you're on hold. So when we look at CIO's forecast of not having any hikes in 2026, the market is now coming a little bit more towards our view, right? We only have one hike now. We don't think any. And in 2027, you're actually kind of on hold. We believe in 27 that the Fed will start to cut simply because we have gross slowing, not cratering, just slowing, and the fact we think the Fed will have some room to cut. But when we think about fixed income and the risk sectors, I'm really happy to have the people that I have on today. They've published a tremendous amount in terms of their area of expertise, and they've had some really, really great calls this year. So Sadiq, I want to start first with you. Speaking of great calls, I mean, you've been at the muni side. We've had, has been a lead in In 2026, you've been pointing out the relative value within the sector. So now that we're at the halfway point, what do you think about what have been the performance drivers up to now and how do you think it performs the rest of the year? Sure, and thank you, Leslie, for having me on the call and the very kind words. So let me just provide a quick recap on what happened in the first half. So the good story here is that Muniz outperformed virtually all of the investment-grade U.S. fixed-income assets, and that too with lower volatility. So that's a good story. The context there is that munis underperformed in a relative sense quite significantly in 2025 have been playing catch-up, and that catch-up trade has really been completed. So munis are outperforming year-to-date as well as on a lagging trading one-year basis. And that all happened despite elevated supply and despite geopolitical risks being elevated, and the key driver of that outperformance has been very strong demand. Year-to-date inflows into munis stand at the second highest in a decade. So a lot of money on the sidelines, which came into munis, and that more than offset supply pressures. The barbell outperformed. The wings of the curve outperformed. Intermediates underperformed as issuers moved supply into the belly of the curve. Lower ratings outperformed as the risk-on environment in terms of spreads was on year-to-date in 2026. The curve is very steep relative to its own history and relative to the Treasury curve. Interestingly, the Treasury curve saw a significant amount of flattening. The 1030s munis flattened a little bit, and the two steps then steepened. So the curve dynamics-wise, it kind of diverged a bit from the Treasury curve. Ratios have fallen across the curve, not surprisingly, because of the outperformance. They do look a little rich compared to, let's say, the five at historical levels. However, tax equivalent yields, which is one of the key things that we watch, are still attractive, and Muniz continues to provide a spread, a tax equivalent spread to treasuries and corporates, especially for the investors in the highest tax brackets. Credit remains resilient on a trading 12-month basis. Index-level par upgrades, both par as well as number of issuers. Upgrades have moderately outpaced downgrades. Credit is resilient despite some pockets of weakness inside of Muniz, but overall we are sanguine on credit quality. Let me come quickly to the second half. We maintain a constructive outlook for munis. We did move them from attractive to neutral. That's driven by the rich ratios and potential for rate volatility, especially given the U renewed conflicts But we still have a constructive outlook and there are two drivers of that The first is as I mentioned the index yield of 3 translates to a tax equivalent yield of 6.2%. That's higher than the structural averages, and especially for folks in California, New York, for resident investors, for in-state bonds, that yield is at about 7.6%. So, So yields still attractive, second driver being strong and stable credit quality. Yeah, we do envisage economic growth slowing in the second half, but overall for the year, it's still coming in at, should come in at around trend. So economic growth should still be supportive of credit quality. State fund reserves, tax collections are both strong. Overall trading trends, as I mentioned, continue to be positive. As we all know, munis are a seasonal asset class. Right now, we are enjoying very strong summer redemption demand. Supply is ramping up. Technicals would weaken likely in that late August, September, October time frame. On the macro front, we expect inflation and treasury yields to decline by year end. Obviously, those things may not happen in a straight line, but overall, that directional strength should be supportive of the muni market. But as I said, there are some near-term, could be some near-term headwinds because of this unpredictable conflict. For positioning, for those investors who have long time horizons, the 20-year part of the curve still looks attractive from an absolute return standpoint. Near-term, we are a little more defensive with roughly about a four-year effective duration stance and the one to 10-year of the curve credit. We are still overweight to single A's relative to the index. Lower ratings have outperformed. The spreads might widen a little bit from here. They're not as tight in Muniland as in corporate land, but they are on the tighter end of things. And in sectors, we continue to like airports. We recommend a small allocation to state geos and also a little bit for those yield-sensitive investors to some prepaid energy bonds, which has seen massive issuance increase this year and continue to offer attractive yields. So overall, a constructive view for munis. They're enjoying strong demand. The ratios are a little rich, but overall, these tax equivalent yields are one of the main drivers of our constructive outlook for the remainder of the year. Yep, thanks, Steve. And, you know, I think that one of the things that you said, too, it was great commentary, but listen, spreads are rich. They are. I mean, there's a few pockets of opportunity, but this is, and we've said this many times before, we've said it in our recent strategist, that the tailwind of total return, you know, over the next six months or the next year is going to be compounding income. And as we talk about compounding income, Letty, I want to turn it over to you. You know, when we look at the high-yield side, listen, the spread's only tied to about 10 basis points. They're one of the top-performing sectors in fixed income, you know, at about 2%. With that said, they've actually lagged the equity market quite a bit, and partly because one of the reasons why they're only up 2% is because they're located in a very short part of the yield curve. We know we've seen a flattening of the yield curve led by the short end moving higher as the market is priced in these hikes. But overall, the sector in terms of defaults are normalizing, but still on a yield basis and on a compounding income basis remains attractive. So if you could just talk about some of the drivers that we've seen these first six months and how you sort of see this compounding income playing into relative value over the remainder of the year. Thank you, and good afternoon, everyone. So to start off with high yield, we have a neutral view on it, and to talk briefly about what we saw the first six months, and then I'll go into our outlook for the next six months. So the beginning of the six months, high yield has been resilient with all this volatility that we had, But it started the year strong, but then we had a hiccup with, you know, when we went to the Iran conflict being it's a risky asset. You know, it was down around 1% in March, and then we saw it spread peak to close to 317 in mid-March. But then, you know, with the resolution near, we saw it rebounding, and it's recovered. And like you stated, it's up, you know, 2%. Energy has benefited from the Iran conflict. We have the energy sector up 5%. and performance was a little bit offset by the higher rates we've seen in the short end. But, yeah, it's been one of the top performers. It's outperformed Treasuries and NIG in the first half. Our view is that by year end, we may see a mid-single-digit return by the end of the year. Spreads are at pre-conflict levels. As you stated also, it's 10 basis points tighter than when we started the year. We could see spreads remain at this level unless there's some disruption within the credit cycle or the economy weakens. We could see spreads staying at this. Our outlook is for the next 12 months spreads to be at 300. They're at 270 now, so it's only 30 basis points wider, which is nothing in high-yield land. High-yield has solid fundamentals, strong corporate earnings, a low default risk of 2%, and it's actually touched our year-end forecast, which was 2%, low leverage. as high-yield companies refinanced their debt during COVID, so they have low leverage, also strong interest coverage. Issuance has been robust thus far at $184 billion, which is a 24% year-over-year increase. We've seen a pickup in data centers, which have represented close to 14% of issuance this year. June was the busiest month following April. We expect issuance to be robust throughout the next six months with a pickup in M&A activity and new AI data centers. Flows also have been positive, you know, consecutive inflows the past six weeks. As for our outlook, it hasn't changed since the start of the year. We're expecting, like I mentioned, mid-single digits. High yield is well positioned over the next 12 months due to having a limited spread compression. Like I said, it may be 30 bits wider within the next 12 months. So we expect low spread volatility. It's mostly a carry trade. It's yielding 7.1%. And it has a cushion. It's a nice 7% handle. And should rates go higher, you have a good cushion with that percentage of yield. Should we have a resolution to the Iron Conflict, it will continue the momentum and sustain it. that we've seen in the asset class. It has a short duration of three years, which historically is about four and a half. So that's also a positive for the asset class. And credit quality has been increasing. Double Bs now represent 60% of the index in high yield. Our recommendation is if you want to have some for the yield-seeking investors that want that 70% high yield to reallocate it to ETFs or mutual funds as you'll get more diversification than investing in a single issuer. So it a good way to gain exposure Real quickly I touch upon loans We are neutral on loans Loans also have been performing well up 1 They had a rough start in the beginning of the year due to the AI disruption concerns. Software sector has recovered. It was down 6% earlier in the year. Now it's only down 3%. And software represents 14% of the loan market. So it is lagging the index, but not as much as it was, so it is recovering. Loan prices are stabilizing. We're seeing inflows as well into their asset class, so that's a positive. So, fault rates are much lower than expected. Early in the year, the street was pricing like 5% of defaults, but default rates are now at 2.2%, down 100 basis points since the start of the year. Our forecast is it could be around 3% within the next 12 months. It might pick up due to the large maturity wall that's coming due in 28, but overall, you know, we don't see, we don't expect any increase, major increases in both the fault rates. Issues have picked up. We had some issuers in the sidelines due to the geopolitical risks and fears of AI disruption, so that's a positive for loans. And loans does have a nice carry. It has eight points, an attractive carry. It's 8.3, so 120 basis points higher than high yield. It's supported with the favorable economic backdrop that we have, elevated coupons. So our recommendation is to invest in high-quality loans, but we do see some vulnerability remaining in the software sector. Okay. Thank you for that. Yeah, I mean, the interesting thing, listen, loans have done, they've recovered quite nicely. We know there was a lot of negative sentiment in February. However, you know, we want to reiterate, it's not as though we don't think loans are going to perform well, But our expectation is that the Fed remains on hold and then the Fed cuts in 2027. So as the market prices and more of a hawkish view, those loans have a tendency to actually carry for a little bit longer. I do want to point out, though, as interest rates have risen and high yield, which does have a little bit of interest rate risk to it, high yield has actually outperformed loans in a rising rate environment. That normally isn't the norm. However, even though we've seen some recovery on the software side, they still are about 200 basis points wider. and it's not like as though we don't like loans. We just believe that the Fed will cut and we would be better quality and shorter and fixed rates. So when we think about the fixed income side, I do want to shift to you, Sungen. We haven't had you on for a while, so I'm really excited to hear your commentary in terms of closed-end funds. I know you have a lot to say and I know you cover quite a bit in terms of various sectors, but again, I want to ask you, the performance drivers the first six months and how do you see the rest of the year padding out for closed-end? Sure, Leslie. Good afternoon, everyone. We've had a pretty stable year for closed-end funds. As Leslie mentioned, I do cover closed-end funds that invest in several fixed-income sectors. For example, I cover some muni funds. We also have preferred funds, senior loans, high-yield funds. And then also on the equity side, we have straight stock funds, REIT funds, and some total return funds, which are a combination of equities and fixed income. Now, closed-end funds, majority of the closed-end funds do use leverage, and therefore, they tend to do better when rates are going down or rates are fairly stable. Last time we saw Fed cut rates was in 2025. This year, we haven't seen any cuts. However, given after those three cuts, the funds and their distribution stability is what's driving the performance of the funds. So, for example, for the first half of this year, most of the funds we cover are up solid either mid-single-digit or double-digit returns. If you stick with the munis, that's where we've seen about 4% to 5% year-to-date returns. These are total market returns. That means it includes the distributions as well. Funds that invest in equities are up well over 10%. REITs are up 12% to 13%. 13%, and these are all strictly the funds that we cover. The one sector where we haven't seen funds do a whole lot, they're pretty much flat for the year, are senior loans. Now, in terms of valuations where these funds are trading, given that we've had steady distribution rates, we've had two or three distribution cuts in the muni funds, but on the taxable side, other than senior loan funds, we have not seen any drastic distribution cuts. And I think that's what drives investors to closed-end funds because it's someone who is looking for monthly income. Closed-end funds do pay out monthly income versus if you are buying a straight muni bond, you are getting paid every six months or buying an equity where you get a dividend every quarter. Looking at the valuation, the muni funds continue to trade anywhere from 1%, 2% discount to as high as 6% discount. We've been pretty neutral on muni funds that we cover. One of the reasons is that several of the funds are, in fact, paying out more than what they're earning. And so, therefore, they do have some return of capital in their distribution. The one group within the muni funds that we like are the non-leveraged funds. That's where we are more positive. Those funds are paying, well, about 4%, 4.5% without leverage, and they tend to be less volatile as well. The other group that has done well and we still think there's value are the equity funds. Even though the equity funds are up 10%, 12%, their discounts haven't narrowed. So some of the funds that we cover are still trading at double-digit discounts. Not to say that this discount is an indicator of what the funds have done. We've seen equity markets are up roughly 10% if you take an average on Dow, S&P 500, and NASDAQ. And these funds are up a little bit over 10%. The underlying net asset values are up as well. The distributions paid out by some of these equity funds are qualified dividend income tax rate, and therefore they get taxed at a lower rate. So we see some opportunities there. And then lastly, in the preferred sector, where funds are trading at a discount, they've had steady distributions because they do use some fixed rate leverage, and that helps when rates do in fact go up. However, we in CIO are forecasting for rates to be flat for the rest of 2026, so that shouldn't impact the preferred funds. Because of their QDI treatment of the distributions also, that's another reason why we like some of the preferred funds that are trading at a discount. With that, Leslie, I can turn it back to you. Great. Thanks, Agita. That was a great recap. And I'm glad you ended with the preferred side because now we going to switch to Frank And Frank you know what you know I left you we put you last because this is the sector that you cover where there are actual pockets of opportunity which is very refreshing to see within the fixed income sector you know, given the fact that most of the headwinds on fixed income have been because of interest rates rising, not spread widening. But some of the sectors that you cover have some potential, you know, true opportunity going forward. So I do want to, again, just ask you some of the same questions in terms of performance drivers the last six months, and just how you see it between, obviously, $1,000 and $25 preferred, and how you see sort of some things panning out throughout the rest of the year, particularly for those sectors that may have faced some weakness the first half of the year. So thanks, Frank. Sure. Thanks, Leslie. I appreciate that. Yeah, I'll keep it brief. I know we have limited time, but you're absolutely right. The outlook for preferreds is positive, but particularly relative to some of the other sectors across the fixed income spectrum. And I'll highlight four points. First, subsector divergence and mean reversion. Looking at the retail $25 par preferreds versus the $1,000 par preferreds, we compare subsector performance as a way to gauge relative oversold or relative overbought conditions. And as of April 30th, year-to-date returns were aligned for both sectors at about 1.4%. But since the $25 par preferreds have lagged, they are now roughly flat for the year, while the $1,000 par preferreds are up by about 2.5%. Now, historically, whenever the $25 par preferreds underperform their $1,000 par counterparts by this magnitude in any given month, it's usually followed by mean reversion relative outperformance the following month. So that's something to keep in mind and something for us to look out for in the weeks ahead. Number two, improved relative value. That pullback I just described, particularly for the $25 par preferreds, have obviously led to higher yields. Now, yield premiums overall are roughly in line with five-year averages and the five-year median, but where preferred yields look more attractive is relative to the other sectors in the fixing of landscape where credit spreads have tightened more significantly, as Leslie and Letty and Sudeep have all mentioned. Relative to the five-year median trends there, $25 par preferreds today actually have a higher yield advantage versus the $1,000 par preferreds and a higher yield advantage versus investment-grade corporates. And also, $25 par yields are more competitive with the high-yield market. So the yield disadvantage that we normally see between high yield yields and $25 par yields has actually shrunk in a bit given the spread compression we've seen in high yield in the second quarter. Number three, technicals. The $25 par underperformance in June was primarily or significantly driven by the June rebalancing in the largest retail preferred ETF out there. That ETF has grown so large that it had to begin adding convertible preferreds to its portfolio. It had to shift and change indices that include convertible preferreds so they could widen the opportunity set for this large ETF without bumping up to individual position limits. And the historically large issuance of convertible preferreds that we saw in June, particularly from the tech sector, led to market imbalances that rippled across the retail preferred space. That should normalize and, for the most part, has largely begun to normalize. Meanwhile, staying on the topic of technicals, in the $1,000 power space, we're likely to experience a wave of call and redemption activities in the weeks ahead. There are a lot of large bank preferreds that will become callable. They'll be reaching their first call date in September. So I expect to see an uptick in call notices going out in the weeks ahead. That should lead to a shrinking in supply and increased reinvestment demand. And then finally, number four, the rate backdrop. As Leslie, you mentioned, it's supportive overall. $25 par preferreds are highly rate sensitive. Rates have been whipsawed by oil price fluctuations, which have been driven, of course, by the U.S.-Iran conflict. At CIO, we don't expect to see Brent crude prices returning to the highs of earlier this year. We think there are strong incentives to negotiate on both sides of the conflict. That should keep oil prices contained, and this should help keep the Fed on hold or should allow the Fed to stay on hold this year and resume rate cuts next year. As you mentioned, Leslie, that's our CIO forecast. And that should allow for lower benchmark treasury rates, which should be supportive of preferreds over the next 12 months. So putting it all together, higher nominal yields, improved valuations relative to other credit sectors make this a good time to consider locking in attractive yields for the long run. And Leslie, possible mean reversion for the $25 par preferreds and a wave of $1,000 par bank preferred redemptions could let support this summer, especially if oil prices cool down. And Leslie, I'll turn it back over to you. Thanks, Frank. That was a great summary. I really appreciate it. And so that's going to conclude our podcast. We will be back in September. And when we come back, once again, we'll have a July FOMC meeting. We will have several inflation and employment reports. And we'll see whether or not August is a summer low or we see heightened volatility. So we'll see you back in the fall. And thanks very much, everyone. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels, along with our video offerings, such as UBS trending. 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