UBS’s call rests on a widening gap between the front and back end of the curve, with long yields pricing in structural fiscal and issuance risk while short yields still have room to fall as disinflation takes hold. That divergence looks harder to defend after Tuesday, when yields across the curve pushed back toward levels last seen before the Treasury’s buyback program expansion, suggesting markets are leaning toward pricing further hikes rather than the cuts UBS needs for its short duration thesis to pay off. Oil remains the key swing factor, with Brent above 92 dollars a barrel and no resolution in sight for Strait of Hormuz disruptions. Until inflation data confirms the fading contribution from energy and tariffs that UBS is banking on, the bank’s preference for quality bonds at the front end carries more risk than the note lets on.
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An ugly Tuesday:
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UBS is betting on disinflation and Fed patience just as the bond market starts pricing the opposite.
Summary:
- UBS notes a global bond selloff at the start of the week, driven by renewed Middle East fighting and rising oil prices
- Iran struck two US air bases in Jordan, prompting a threat of further US retaliation, while Washington struck Iranian mine laying vessels in the Strait of Hormuz over the weekend
- 10 year Treasury yields rose to nearly 4.78 percent, the highest since January 2025, with the 30 year at 5.27 percent
- Long dated German, French and Japanese government bond yields all reached multi decade highs, while Brent crude climbed above 92 dollars a barrel
- UBS revised its year end forecasts to 5 percent for the 30 year and 4.5 percent for the 10 year Treasury yield, but maintains a preference for short to intermediate maturity quality bonds
- The bank expects gradual disinflation, a recovering Strait of Hormuz and a patient Federal Reserve to support declining yields at the front end of the curve
- On Tuesday, global yields climbed back toward levels last seen before Treasury Secretary Scott Bessent expanded the government’s buyback program, as rising oil prices stoked fresh inflation concerns and rate hike expectations
UBS is sticking with a preference for short to intermediate maturity government and corporate bonds even as a fresh escalation in the Middle East drives long dated yields to some of their highest levels in years, arguing that the structural pressures pushing up the back end of the curve should not be read as a reason to abandon shorter dated quality debt.
The bank’s note points to a familiar chain of events behind the latest bond selloff. Iran struck two US air bases in Jordan, prompting President Trump to threaten further strikes against Tehran, while Washington said over the weekend it had hit Iranian vessels deploying mines into the Strait of Hormuz. The result was a sharp move higher in yields, with the 10 year Treasury climbing to nearly 4.78 percent, its highest level since January 2025, and the 30 year reaching 5.27 percent. Long dated German and French bonds hit their highest levels in 15 years, the 10 year Japanese government bond briefly touched 3 percent for the first time in three decades, and Brent crude pushed above 92 dollars a barrel.
Against that backdrop, UBS has revised its year end Treasury forecasts higher, now expecting the 30 year and 10 year yields to finish the year at 5 percent and 4.5 percent respectively. The bank frames this as a genuine structural shift rather than a temporary risk premium, citing ongoing fiscal concerns and heavy AI related debt issuance as durable sources of upward pressure on long dated yields. Even so, UBS maintains its preference for the short to intermediate segment of the curve, arguing that yields there still have room to decline. That view rests on an expectation that oil flows through the Strait of Hormuz will recover gradually, that the inflationary contribution from energy and tariff sensitive categories will keep fading, and that pending methodological revisions to how digital goods and financial services are priced could shave two tenths of a percentage point off core inflation. On that basis, UBS expects the Federal Reserve to hold rates steady for the remainder of the year, with rate cut expectations gradually returning as confidence in disinflation builds.
That thesis looks considerably harder to sustain in light of what followed. On Tuesday, global bond yields climbed back to their highest levels in almost two decades, with long dated Treasuries retracing toward the levels that prompted Treasury Secretary Scott Bessent to expand the government’s buyback program just last month in an effort to arrest the earlier rise. Rising oil prices were again the immediate trigger, but the more significant shift is that investors appear to be pricing in further rate hikes rather than the cuts UBS is counting on. The bank’s disinflation argument may well prove correct over time, but with the Strait of Hormuz disruption showing no sign of easing and yields moving further away from UBS’s base case rather than toward it, the note’s sanguine framing looks premature relative to where the market has moved since it was written.
This article was written by Eamonn Sheridan at investinglive.com.