UBS's view challenges the more hawkish end of Fed expectations, and if incoming inflation data softens as it expects, the front end of the curve stands to benefit most as hike pricing is pared back. Oil remains the key swing factor: with Brent around $100 on the Iran war, any credible progress on reopening Hormuz traffic would ease one of the main forces pushing yields higher, while fresh attacks on shipping would do the opposite. The bank's caution on the longest maturities points to continued curve steepening pressure from fiscal deficits and AI-related issuance even if shorter yields fall. Friday's payrolls and Fed speakers such as Logan, who favours 50bps or more of further hikes, are the immediate tests.---UBS thinks the bond market has priced too many Fed hikes and too little hope, and argues today's yields pay investors to wait out the volatility.Summary:UBS expects Treasury volatility to stay high near term but rates fixed income AttractiveIt sees market pricing of nearly four more Fed hikes by end-2027 as too aggressive, citing softer core PCE and benign revisionsImproved energy flows through Hormuz and renewed diplomacy could ease inflation fearsPolicymakers could take further steps to contain long-term yields, such as liquidity rule changesBy UBS estimates, 2-, 5- and 10-year yields would need to rise about 255, 110 and 65bps before losses exceed incomeThe bank remains cautious on the longest maturities given deficits and AI-related issuanceUBS expects volatility in US Treasuries to stay elevated in the near term but sees three potential catalysts that could help stabilise the market, and it continues to rate fixed income as Attractive despite the steepest global bond losses in two years.In a note written before Thursday's partial rebound in bonds, UBS said the selloff reflected both cyclical and structural pressures. Treasuries had fallen for seven straight sessions to Wednesday, taking the 10-year yield above 5.3% for the first time since 2007 and the 30-year to its highest in 24 years, while global government bonds posted their worst quarterly loss since 2024. The bank pointed to the Middle East conflict, with Brent holding around $100 a barrel, strong US growth, heavy bond issuance by hyperscalers funding AI expansion, persistent fiscal deficits and hedge fund repositioning.The first catalyst is further disinflation. Markets are pricing close to four more quarter-point Fed hikes by the end of 2027, which UBS considers too aggressive. It noted that August core PCE inflation came in below consensus, that annual revisions painted a more benign inflation picture, and that the three-month annualised core rate fell to about 2%, the lowest since July 2024. With the Fed starting this tightening cycle from a much higher base than in 2022, the bank sees a long run of hikes as unlikely.The second is improved energy flows. UBS acknowledged the war, now entering its eighth month, has lasted longer than expected, but said both Washington and Tehran have economic reasons to reach a deal, and that diplomatic activity appears to have picked up since the UN General Assembly. Clearer signs of recovering traffic through the Strait of Hormuz could ease inflation fears and support Treasuries.The third is policy action. The bank noted the US Treasury doubled its buyback operations in August, with only a brief effect, but said policymakers could consider further steps, such as adjusting bank or insurance liquidity rules to create additional demand for government debt, if rising yields threaten stability.UBS argued that today's higher yields provide a cushion that was absent in 2022. By its estimates, two-, five- and 10-year Treasury yields would need to rise by around 255, 110 and 65 basis points respectively before capital losses outweigh income. The bank favours shorter maturities for income-focused investors and selective medium- to long-duration high-quality bonds for those able to tolerate volatility, while staying cautious on the longest maturities given fiscal worries and AI-related issuance.Since the note was written, the 10-year yield briefly reached its highest since 2002 on Thursday before easing, though the energy risk remains live after another tanker was struck in the Strait of Hormuz the same day. This article was written by Eamonn Sheridan at investinglive.com.