UBS: Bonds in a Risk Cycle Like No Other
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In its Wolfsberg Seminar materials, UBS characterizes the current bond market environment as a risk cycle unlike any other. Private sector leverage continues to decline, and household net financial assets remain elevated, rendering risk assets and the broader economy less sensitive to policy rate changes. Simultaneously, AI-related debt and fiscal supply are expanding, while a Federal Reserve led by Warsh, inflation shocks, and global rate spillovers complicate how bonds react to risk assets. UBS emphasizes the interactions between duration, supply, AI financing, and policy frameworks rather than viewing bonds merely as recession hedges.
Inflation shocks typically trigger bear flattening, whereas negative growth shocks prompt bull steepening, making current curve signals highly nuanced. UBS stresses measuring bond supply through duration risk—such as 10-year equivalent issuance—rather than nominal debt totals. Notably, AI financing is creating a new long-term debt universe, with hyperscaler dollar bond issuance reaching approximately $245 billion since 2024. However, major AI model releases have not driven 10-year Treasury yields lower, suggesting AI optimism is reflected more in risk assets and credit supply.
Consequently, UBS adopts a selective approach to duration and curve trades. The bank targets the US 10-year yield to end the year around 4.25%, with the 30-year near 5% attracting buyers. Strategically, UBS maintains a long position in 10-year German Bunds against EU bonds and expresses high confidence in a 6-month forward 2s10s steepening trade in Japan.