UBS Warns Global Markets 2026: Debt Crisis, AI Bubble Risk

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Things We Know

Higher Gold Prices Despite Elevated Real Rates

Gold has demonstrated remarkable resilience in 2025, trading at elevated levels despite US real rates remaining above historical averages. This relationship breaks from the traditional inverse correlation between gold and real interest rates, suggesting fundamental shifts in investor behavior and central bank purchasing patterns.

Central bank gold accumulation has accelerated significantly, driven by diversification away from dollar reserves and geopolitical hedging. This structural demand has created a new baseline for gold prices that appears less sensitive to traditional rate dynamics.

A Second Chinese Trade Shock

China's export prices are falling faster than in the rest of Asia and advanced economies, creating deflationary pressure across global supply chains. This second wave of Chinese deflation export follows the initial shock from the 2000s and represents a structural challenge for global inflation dynamics.

The pace of Chinese export price decline has accelerated in recent quarters, driven by excess manufacturing capacity, weak domestic demand, and competitive pricing strategies. This trend creates headwinds for central banks attempting to maintain inflation targets and complicates monetary policy normalization.

Unusually Concentrated US Growth

US economic growth has become exceptionally concentrated in specific sectors and large-cap technology companies. The top 10 companies in the S&P 500 now represent an unprecedented share of market capitalization and earnings growth, creating both opportunities and risks for investors.

This concentration extends beyond equity markets into employment growth, with technology and healthcare sectors driving the majority of new job creation. The sustainability of this concentrated growth pattern represents a key uncertainty for 2026 economic forecasts.

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Things the Market Thinks It Knows

Carry and Risk-On Trades Under Trump 2.0

Markets have positioned for a continuation of carry trade attractiveness and risk-on dynamics under the second Trump administration. Since the November 2024 election, US equity markets have gained 21% while the dollar has declined 6%, echoing patterns from Trump's first term.

However, important differences exist between Trump 1.0 and 2.0. US 2-year yields have declined 60 basis points from election levels, while 10-year yields rose only 1 basis point, suggesting different market expectations around policy implementation and economic outcomes.

Increased Risk of Bubble But No Bubble Yet

Equity valuations have reached elevated levels by historical standards, with forward P/E multiples in the US equity market approaching levels last seen during the dot-com era. However, UBS assessment indicates bubble risk has increased but a full bubble has not yet formed.

Key differences from previous bubble episodes include stronger underlying earnings growth, more diversified revenue sources for leading companies, and tighter financial conditions compared to the pre-2008 period. These factors suggest caution is warranted without justifying a full defensive positioning.

Trade-Offs Between Term Premia and Rate Expectations

Decomposition of yield changes in 2025 reveals important trade-offs between movements in term premia versus changes in rate expectations. In the US, 10-year yields rose approximately 80 basis points, with roughly 40 basis points attributable to higher term premium and 40 basis points to increased rate expectations.

This balance differs significantly across markets. German bund yields saw larger term premium increases, while UK gilts experienced more dramatic shifts in rate expectations. Understanding these trade-offs is critical for positioning in 2026 as central bank policy paths diverge.

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Things We Do Not Know

Capacity of Markets to Absorb Sovereign Debt

A critical unknown for 2026 is the capacity of global fixed income markets to absorb unprecedented levels of sovereign debt issuance. Fixed income investors are highly sensitive to interest rate risk, which varies dramatically across different maturities.

For example, $1 billion of US 10-year Treasury notes has a 10-year equivalent value of $1 billion (assuming duration of 8). However, $1 billion of 5-year notes has a 10-year equivalent of only $563 million (duration of 4.5), while $1 billion of 2-year notes has a 10-year equivalent of just $240 million. This duration-adjusted absorption capacity will become increasingly important as governments refinance maturing debt and fund new deficits.

The composition of buyers has shifted materially over the past decade. Federal Reserve holdings have declined significantly, while foreign central bank demand has become more selective. Private sector absorption capacity will be tested, particularly if term premia rise further or if credit conditions tighten.

Strength of US Labour Market and Fiscal Boost

The true underlying strength of the US labour market remains uncertain. Recent payroll data shows total nonfarm payrolls excluding healthcare and social assistance have averaged -41,100 jobs over recent months, contrasting sharply with headline payroll growth.

This divergence raises questions about the sustainability of employment growth and the potential for labour market deterioration if healthcare sector hiring normalizes. The fiscal impulse from potential Trump administration policies adds another layer of uncertainty, with estimates of GDP impact ranging widely depending on implementation details and congressional cooperation.

"The composition of US employment growth suggests underlying weakness masked by exceptional strength in healthcare hiring—a pattern that may not persist through 2026."

US Curve Under New Fed Chair

The appointment of a new Federal Reserve Chair introduces significant uncertainty around US yield curve dynamics. Historical precedent shows that Fed leadership transitions can materially alter the trajectory of term premia and the slope of the yield curve.

Ownership patterns of US Treasuries have evolved dramatically, with hedge funds and other leveraged investors taking larger positions while foreign official holders have reduced their share. A new Fed Chair's policy framework and communication style could trigger significant repositioning across these investor groups.

UBS analysis suggests that a 1 percentage point real GDP surprise could shift the US yield curve by 40-100 basis points across different tenors, with the response split between changes in risk-neutral rates and term premium. The new Fed leadership's approach to balance sheet policy and forward guidance will be critical in determining this sensitivity.

Impact of Monetary and Fiscal Regime Shift in Japan

Japan is undergoing its most significant monetary and fiscal policy regime shift in decades. The Bank of Japan has moved away from negative interest rates and yield curve control, while the government is reconsidering fiscal consolidation targets. These simultaneous shifts create profound uncertainty for global bond markets.

Spillover analysis indicates that Japanese Government Bond term premia movements historically explain 15-35% of variation in global bond markets, with particularly strong transmission to USD, EUR, and AUD markets. A sustained increase in JGB term premia could have far-reaching consequences for global rate levels and currency markets.

Impact of German Debt Brake and Future of EU Debt

Germany's potential removal of its constitutional debt brake represents a pivotal moment for European fiscal policy and bond markets. UBS estimates suggest that removal of the debt brake could lower 10-year bund yields by up to 250 basis points through reduced term premium, while also allowing for higher ECB policy rates to combat any inflationary effects.

Beyond Germany, the future architecture of EU-level debt issuance remains highly uncertain. The success of NextGenerationEU pandemic recovery bonds has created a template for collective debt issuance, but political will for permanent fiscal integration remains fragile. The outcome of this debate will shape euro area bond market dynamics for years to come.

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UBS Investment Bank Views

UBS maintains a constructive outlook for 2026 while acknowledging elevated uncertainty across multiple dimensions. Top fixed income trades published in the November 2025 outlook include long positions in US 10-year, UK 30-year, and 30-year Italy versus Germany.

Additional positioning includes long 5-year forward 5-year Australia versus New Zealand, and a short position in 10-year JGB (though UBS closed its multi-year short position in 2-year forward 1-year JGB on 2 February 2026 as the Bank of Japan's policy shift materialized).

Economic Forecasts

UBS forecasts global real GDP growth of 3.3% in 2026, with the US economy expanding 2.6% and China growing 4.5%. The Eurozone is expected to see more modest growth of 1.1%, reflecting continued structural headwinds and fiscal consolidation pressures.

These growth forecasts embed assumptions about trade policy, fiscal stimulus, and monetary policy paths that carry significant uncertainty. The forecast for US growth represents a tale of two halves, with stronger momentum in the first half potentially giving way to moderation as fiscal effects fade and monetary policy remains restrictive.

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Investment Conclusion

The 2026 outlook is characterized by a complex interplay between observable trends, market consensus views, and critical unknowns. UBS maintains a constructive stance but emphasizes the importance of flexibility and risk management given elevated uncertainty across sovereign debt absorption capacity, labour market dynamics, and central bank leadership transitions.

The firm's top fixed income trades reflect conviction in specific relative value opportunities while acknowledging broader market uncertainties. Long positions in US 10-year, UK 30-year, and Italy-Germany 30-year spreads are predicated on views about term premium evolution and fiscal policy trajectories that could shift materially if key unknowns resolve differently than expected.

Investors should focus particular attention on developments in Japan's policy regime, Germany's fiscal framework, and the composition of US employment growth as early indicators of how 2026 uncertainties may resolve. These factors will likely prove more consequential than consensus narratives around Trump 2.0 policy or equity market valuations in determining fixed income returns over the coming year.