A diversified approach to income is ‘essential’ now, according to UBS
Income investors should be well diversified owing to expectations of uncertain and rocky markets this year, according to UBS. The investment bank anticipates volatility will more than likely be much higher than what the market saw in 2025. “Given tight credit spreads and uncertainty around government debt, we think a diversified approach to yield generation is essential,” the UBS chief investment office wrote in a note last week. When credit spreads are tight, investors get less compensation for taking on credit risk. There are plenty of variables that may weigh on the market, beyond the absolute level of government debt, including a new Federal Reserve chair, the midterm elections and a Supreme Court ruling on tariffs, said Leslie Falconio, head of taxable fixed income strategy in UBS Americas’ chief investment office. She likes to have exposure to some fixed-income sectors that have a higher correlation to the equity market, like corporate credit, and some that aren’t as correlated, like agency mortgage-backed securities. “Keeping that diversification allows you to still earn that income, compounding income, which we believe is a driver, but also to not have too much concentration risk within your portfolio,” Falconio said. Finding opportunity Investors can spread allocations throughout fixed-income, including investment-grade corporates and securitized products, as well as into other income-producing assets. Within bonds, Falconio is leaning into high-quality right now and is being selective in other areas, such as high yield. “There’s not a credit issue that we’re worried about,” Falconio said. “We just think we can get wider spread.” As those spreads widen, she’d start adding exposure on the short end of the curve. “You take that carry and as interest rates back up, and we believe they will at some point this year, you start to add on to your interest-rate risk,” she said. Falconio is also watching the Treasury market, where the 10-year yield has been in a tight range over the past several months. The 10-year yield — used to price auto loans, mortgages and credit cards — is currently around 4.15% “Our overall outlook is you’re going to be mostly range bound during the year, but you’re going to have these outlier moments,” she said. “When yields go down, you lighten up on interest-rate risk, but we buy on the dip as well.” US10Y 1Y mountain 10-year Treasury’s yield over one year UBS expects medium-duration quality bonds to deliver mid-single-digit returns in 2026. In addition to bonds, investors may consider dividend stocks and private credit for added diversification, UBS said in its 2026 outlook . Investors have been piling into private credit, which is now seeing tight spreads and pockets of financial stress, the firm noted. Therefore, careful selection is necessary, it said. “We like sponsor-backed loans (to private equity-owned firms) and senior loans (with repayment priority), and believe investors should focus on larger companies and sectors that are less sensitive to economic swings and carry less debt,” UBS wrote. Lastly, yield-generating structured investments are another way to boost income, UBS said in its outlook. The securities, like equity-linked notes, provide a yield in exchange for buying an instrument at a predefined lower price. “Lower rates make these structures relatively more attractive, although low volatility can mean option premiums and yields are reduced,” UBS wrote. “We recommend careful attention to liquidity, issuer and market risks within a diversified portfolio.”
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