A global bond sell-off has pushed long-dated yields to multi-decade highs, but UBS says short- and medium-maturity quality bonds still hold up. The bank's analysts argue today's higher front-end yields already cushion investors against further rate rises, even as the long end stays exposed to fiscal and inflation risk.
Long-dated yields hit multi-decade highs
A global bond sell-off drove yields to multi-decade highs on Tuesday, hitting the longer end of the curve hardest. The 30-year Treasury yield is now hovering close to its highest level since 2007. Japan's 10-year bond yield reached its highest level in three decades.
The pressure spread across Europe too. German 30-year bund yields hit their highest point since 2011. Rates on France's 30-year bond reached their highest level since 2008.
UBS sees value at the front end
As the long end of the curve looks increasingly capricious, short-term bonds may offer a solution to uncertainty further down the line, according to analysts at UBS. According to UBS: "the front end of the yield curve has stayed relatively anchored", the analysts wrote in a note published Wednesday, and they do not think the rise in long-term yields invalidates the case for quality fixed income.
The analysts added that today's higher yields offer a cushion against further rate increases before investors could experience a potential loss. UBS analysis indicates that the 2-year and 5-year Treasury notes would need to rise by around 100 to 230 basis points from current levels for falling bond prices to cancel out income returns.
With the long end of the curve more exposed to fiscal concerns, inflation uncertainty, and lower liquidity, the strategists said they continue to see short- and medium-maturity quality bonds as attractive.
Why the sell-off started
Fixed income strategists tie the sell-off in longer-dated debt that began in June to intensified concerns over a budget deficit that appears set to eclipse its 2025 level, persistently above-target inflation, and a rash of corporate debt issuance competing with Treasurys for investors' favor. As a result, many investors are turning to short-term investments, particularly ultra-short bond funds, amid persistent concerns that long-term bonds are no longer providing portfolio diversification. Ultra-short bond ETFs saw inflows of $12.8 billion in July, according to Morningstar Direct.
Source: US Top News and Analysis
Trading involves risk.
Risk Disclaimer
