UBS sees peak in yields

Yesterday's move lower in yields was attributed to news that noted investors Bill Ackman of Pershing Square Capital Management and PIMCO co-founder Bill Gross shifted their bearish bets on bonds. Ackman said his firm covered their bond short as"here is too much risk in the world to remain short bonds at current long-term rates." He added that the economy is slowing faster than recent data suggests.

The analysts highlight that yields rose to 5% on the 10-year yield amid three drivers: “higher-for-longer” policy rate expectations, resilient consumption growth and fiscal expansion, and the term premium, or the extra compensation investors require to hold longer-term debt instruments rather than a series of shorter-dated ones over the same period.

Commenting on how investors should invest, the analysts said they prefer high-quality bonds in the five-year point. “We retain a preference for high-quality bonds in the 1–10-year maturity segment, particularly the five-year point, since running yield and capital upside should quickly reverse recent drawdowns over our tactical investment horizon," the analysts commented."Despite a move higher in yields of nearly 100bps, the total return on a five-year high-quality bond investment is essentially flat, demonstrating how higher outright yield levels can protect against mark-to-market volatility.

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