UBS predicts that the 10-year Treasury yield will decrease to 3.5% by the end of 2024, down from its current level of approximately 4.3%. The decreased yield will come as a result of anticipated rate cuts by the Federal Reserve, which is expected to implement two to three interest rate reductions in the coming year. The bond rally is expected to persist into 2024, with UBS attributing the boost in debt markets to dovish Federal Reserve monetary policy.
Market expectations of a federal reserve pivot have already bolstered Treasury prices, partially reversing a massive sell-off that extended through October. According to UBS, November marked the best performing month for US fixed-income since 1985, with global bonds experiencing their best month since 2008. Despite this strong run, UBS is optimistic that bonds can rally further in the next year, as the Fed is seen reaching the end of its hiking cycle due to the recent cooling of inflation and a slowdown in the labor market.
While markets are predicting the possibility of Fed rate cuts beginning as early as March, UBS anticipates that the cuts are more likely to start in July. Despite the expected decline in yields, UBS acknowledges that the situation may not be steady, especially given the mixed signals that have been sent by Fed officials regarding the unwinding of monetary policy.
Concerns about the flood of new Treasurys being issued may also resurface, particularly as the increased debt supply led to a jump in the term premium this year. UBS warned that the market’s biggest risk is a failed bond auction, but believes that future debt supply concerns should be manageable. The bank points out that bank reserves have remained steady, despite earlier concerns that the Fed’s ongoing balance sheet reductions would drain their cash, allowing dealers to continue acting as buyers in weak auctions.
UBS also expects that the Fed would intervene in the bond market to restore stability if necessary and recommends high-quality bonds with a 1–10-year duration, particularly the five-year segment. This announcement came in a note from UBS on Friday.
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