UBS: 10-Year Treasury Yield Must Rise About 65 Basis Points Before Income Investors Should Worry

Treasury yields remain elevated, but income investors do not need to be concerned just yet. The benchmark 10-year note rose on Friday after initially dropping on a weaker-than-expected September jobs report and remains near 5.29%, following its highest levels since 2002 earlier in the week. With bond yields moving inversely to prices, investors are watching the Federal Reserve’s monetary policy trajectory. The central bank raised rates in September, and markets are pricing in a 67% probability of another hike in December, per the CME FedWatch tool. For now, income payments help cushion against further price declines, UBS noted in a Thursday report. “Current elevated outright yields offer a carry cushion against potential further volatility that was not available in 2022,” said Ulrike Hoffmann-Burchardi, chief investment officer for the Americas and global head of equities at UBS Financial Services. The firm’s analysis indicates that 10-year Treasury yields need to rise roughly 65 basis points from current levels for capital losses to outweigh the income earned. The two-year and five-year yields would need to climb 225 and 110 basis points, respectively, she added. Hoffmann-Burchardi continues to see opportunities across regions and segments, recommending that income-oriented investors favor short-maturity bonds to reduce duration risk. Those comfortable with volatility may consider select tactical opportunities in medium- to long-duration bonds, though fiscal concerns and AI-related issuance keep her cautious on the longest maturities. Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, also views the current environment as attractive for income. “We’re seeing yields at what amount to two-decade highs, and people are still nervous instead of focusing on the positives,” he said. “These are attractive yields. That doesn’t mean we can’t see them rise a bit more or experience modest price declines if you hold bonds. But from an income standpoint, these are relatively attractive opportunities.” Martin favors short and intermediate maturities, including investment-grade corporate bonds and high yield. “The characteristics of the high-yield index have changed over time, and it’s a relatively high-quality index these days,” he said.

Source link