UBS Forecast for US Bond Yields

UBS has released its latest forecast regarding the US 10-year bond yield, predicting it will rise to 4.25% by the end of 2025, while the 2-year note yield is expected to reach 3.65%.

The research firm indicated that in the near term, risks could escalate if US core PCE inflation increases to 2.8% in the first quarter, but then descends to 2% by the third quarter of 2025.

Furthermore, UBS predicts that US GDP is not expected to decelerate below trend until the second quarter of 2025. They highlighted potential early aggressive actions by President Trump on tariffs, immigration, and the Federal Reserve, which could heighten risks in the near term. Despite these concerns, UBS believes that the recent sell-off in UK gilts, particularly at the short end, is excessive, projecting 3.25% UK short rates by year-end.

Additionally, the report discussed implications for bond markets, noting that bond yields exceeding 5% could be worrisome. However, if General AI technology boosts productivity by 1% starting from 2028, the equity risk premium (ERP) is estimated to be 4.3%, compared to the current warranted level of 3.9%, which is supported by consistent ISM/PMI data and stable credit spreads.

UBS anticipates a 35% chance of a market bubble forming. In such cases, the price-to-earnings (P/E) ratio of bubble areas, which could encompass up to 40% of market capitalization, could reach at least 45 times in a bond yield environment of at least 5.5%. In contrast, the current P/E ratio for the ‘Mag 6’ stands at 34 times.

The report concludes by noting the unusually strong position of corporate, especially tech, balance sheets relative to government ones, which could facilitate a lower ERP.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.