Fixed Income Outlook Positive, UBS Says
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Despite climbing US Treasury yields this week amidst election uncertainty and global debt concerns, UBS maintains a positive outlook on fixed income. The Chief Investment Office of the Swiss bank cites anticipated easing of Federal Reserve policy and robust corporate bond fundamentals as key drivers, according to a note published Tuesday.
The benchmark 10-year Treasury yield rose 11 basis points to 4.20% on Monday, marking a 40 basis point surge since the beginning of October. This recent spike is attributed to better-than-expected economic data dampening hopes for aggressive Fed easing, and rising market speculation regarding a potential Donald Trump presidential victory, which some analysts believe could lead to increased Treasury supply and a widening deficit. Adding to these concerns, the International Monetary Fund recently projected global public debt to exceed $100 trillion by year's end.
However, UBS cautions against overreacting to election betting odds so close to the vote. Instead, the bank emphasizes a constructive macro backdrop for fixed income, driven by the Fed's commitment to further interest rate reductions.
“While recent data indicate a more resilient US economy, the broad disinflation trend is still intact,” stated the UBS report. The firm anticipates a further 50 basis points of rate cuts in 2024 and an additional 100 basis points in 2025, pushing Treasury yields lower. This stance is corroborated by recent comments from various Fed officials expressing support for further rate cuts, albeit at varying paces.
Beyond Treasuries, UBS sees strength in investment grade (IG) corporate bonds, citing a resilient economic backdrop and limited credit quality deterioration.
"We see returns in the high-single-digit range over the coming 12 months, supported primarily by elevated yields and low spread volatility," said the bank, point out that any widening of spreads due to growth concerns should also be more than offset by declining interest rates.
"We continue to recommend investors shift excess cash into quality fixed income as the rate-cutting cycle advances and erodes cash returns," UBS concluded.