UBS Predicts 10-Year Treasury Yield to Drop to 3.5% by 2024
According to UBS, the 10-year Treasury yield is expected to decrease to 3.5% by the end of 2024, down from the current rate of about 4.3%. This drop is anticipated as the Federal Reserve plans to implement two to three interest rate cuts next year.
In a note released on Friday, UBS projected that the bond rally would continue into 2024 due to the dovish monetary policy of the Federal Reserve. Market expectations of a central bank pivot have already boosted Treasury prices, partially reversing a massive sell-off that occurred from 2020 to October. In November, US fixed-income experienced its best performing month since 1985, with global bonds enjoying their best month since 2008.
UBS believes that despite the strong run, bonds can rally even further next year. The recent cooldown in inflation and the easing of the labor market support the view that the Federal Reserve has likely reached the end of its hiking cycle. These factors, along with a drop in excess savings, are expected to continue bearing down on inflation, allowing the Fed to lower rates.
While markets are pricing in the possibility of Fed rate cuts starting as early as March, UBS predicts that they are more likely to begin in July. However, the decline in yields may not happen steadily, as Fed officials have sent mixed signals about how monetary policy will unwind. Additionally, concerns about a flood of new Treasurys being issued and the term premium have caused fluctuation in the bond market.
UBS warned of potential risks for the market, including failed bond auctions and debt supply concerns. However, the note added that future debt supply concerns should be manageable, as bank reserves have held steady, allowing dealers to continue acting as buyers in weak auctions. UBS also expects the Fed to intervene in the bond market to restore stability, if necessary.
In light of these predictions, UBS recommends high-quality bonds, specifically high grade/government and investment-grade bonds with a 1–10-year duration, particularly in the five-year segment.
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