Treasury bonds are coming off of one of their worst routs of all time. But amid the carnage, one major European investment bank sees opportunity.
Mark Haefele, the chief investment officer at UBS Global Wealth Management, said in a note to clients shared with MarketWatch on Monday that a “soft-ish” landing for the U.S. economy, coupled with his expectation for Federal Reserve interest-rate cuts later next year, should eclipse concerns about the U.S. budget deficit and spark a powerful rebound in Treasurys.
Between early May and early October, the yield on the 10-year Treasury rose from
3.3% to 4.8%, with roughly half of that increase occurring since the start of September, Haefele noted.
While UBS doesn’t expect a deep U.S. recession in 2024, Haefele believes that a soft landing for the economy should help to support Treasurys. But investors who opt to buy bonds now will benefit from both higher yields and strong total returns if the U.S. economy does succumb to the Fed’s interest-rate hikes.
The 10-year Treasurys could book a total return of 19% by June if the U.S. economy enters a recession during the coming months, Haefele said.
Haefele and his team sounded more lukewarm about stocks, reflecting comments from another team of UBS strategists made late last week. Late last week, David Lefkowitz, head of U.S. equities at UBS, told UBS clients that he was tweaking his target for the S&P 500 to reflect a slightly more downbeat outlook for U.S. stocks. He now expects the index won’t reach 4,700 until December 2024, instead of June. That puts UBS in the middle of the pack for S&P 500 targets.
As earnings season gets underway, Lefkowitz said he expects U.S. corporate earnings to have grown on a year-over-year basis during the third quarter following three straight quarters of contraction, a view that’s become increasingly common on Wall Street. For 2024, he expects earnings growth of 9%. However, expectations that Treasury yields will remain higher for longer will likely dampen equity returns.
“Our new price targets are 4,500 for June 2024 and 4,700 for December 2024. The delay from June to December in our 4,700 target is primarily related to the recent rapid move higher in interest rates and our fixed income colleagues’ expectations that interest rates will remain higher for longer,” Lefkowitz said.
Haefele added the following: “Bonds remain our preferred asset class. We are neutral on global equities overall, but continue to favor emerging market stocks.”
Not everyone agrees with UBS, of course. Omega Advisors chairman and CEO Leon Cooperman said last week that he wouldn’t touch long bonds until yields moved well above 5%. Pershing Square Capital Founder Bill Ackman revealed over the summer that his firm had bet against 30-year Treasurys on the expectation that yields could rise to 5.5% or higher.
But plenty have lined up to buy at these levels as well. Despite heavy losses. Investors, including both retail and institutional players, poured more than $920 million into the iShares 20+ Year Treasury Bond ETF
TLT,
one of the most popular Treasury bond ETFs, in September, the heaviest monthly inflow all year, according to the latest data available from FactSet.
Treasurys have been caught in one of the worst bear markets, if not the worst bear market, in the history of the U.S. Bank of America strategists have pointed out that Treasury prices are set to decline in 2023 for the third straight year, what would be an unprecedented occurrence.
Bond-market strategists have blamed the selloff on a range of factors, including the Fed’s most aggressive interest-rate hikes since the 1980s, stubbornly higher inflation, and investors demanding higher term premiums from longer-dated bonds to compensate them for considerable uncertainty surrounding the outlook for the central bank’s monetary policy. For what it’s worth, Haefele and his team dismissed the notion that stubborn inflation in the U.S. has driven the latest leg higher in yields.
Treasury yields were rising early Monday, with the yield on the 10-year
BX:TMUBMUSD10Y
up 6.2 basis points to 3.875%, while the yield on the 30-year bond
BX:TMUBMUSD30Y
rose 8.5 basis points to 4.125%. Bond yields move inversely to prices, rising as prices fall.
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