UBS Asset Management sings a different tune: Rate hike risk is looming, with the 2/10-year US Treasury yield spread potentially widening to 100 basis points.

Kevin Zhao, Global Sovereign and Currency Manager at UBS Asset Management, said that due to the economic growth rebound, the Federal Reserve will have to shift toward raising interest rates next year, which will lead to a significant widening of the yield spread on US bonds. Zhao said, "If economic growth rebounds, unemployment declines, and inflation remains high, then by the middle of next year, the reasons for the Fed to raise interest rates will become evident." This bold prediction contrasts sharply with the market's general expectations. The Federal Reserve just conducted its first rate cut since 2025 on Wednesday, and the latest dot plot shows two more rate cuts this year. Derivatives contracts also indicate that the Fed will make five more rate cuts by the end of 2026. Investors, including The Pacific Investment Management Company (Pimco), also anticipate further rate cuts in the future. Zhao added that two more rate cuts by the end of this year are "reasonable" for the Federal Reserve. In his view, although the next Fed chair may initially resist a shift toward monetary policy tightening, if more policymakers push for rate hikes, the prospect of further rate cuts may be overturned. He stated that once the broader market realizes the need for the Fed to raise rates, the yield spread between two-year and ten-year US bonds will widen to 100 basis points, driving the overall yield curve steeper. In the past few weeks, the yield spread between these two maturities has narrowed to about 50 basis points. Zhao is waiting for it to narrow to around 40 basis points before initiating a trade to profit from the steepening yield curve. Data shows that his Global Dynamic Bond Fund has returned over 7% year-to-date, outperforming 89% of similar funds.