UBS says to buy the bond market panic

• The closure of the Strait of Hormuz has pushed oil and gas prices higher, causing UK 30-year bond yields to reach 28-year highs, German yields to hit 15-year peaks, and US 30-year Treasury yields to rise above 5.1% for the first time since the 2007 credit crunch
• Markets are now pricing in another Federal Reserve rate hike over the next year as central banks may need to keep rates higher for longer to combat inflation, though UBS believes current yields offer appealing risk-return profiles for short- and medium-maturity bonds
• UBS maintains that higher yields will soon attract fresh investor demand to stabilize markets, noting that foreign investors remained active buyers of long-dated US debt despite softer auction demand, and does not expect higher yields to derail the current equity rally

Summary

Key Development: UBS advises investors to buy both government bonds and equities despite a sharp global sell-off in government debt, triggered by inflation fears from Middle East conflict and the closure of the Strait of Hormuz.

Market Impact

• UK 30-year government bond yields reached a 28-year high
• German equivalent borrowing costs hit 15-year highs
• US 30-year Treasury yield exceeded 5.1%, highest since the 2007 credit crunch
• Closure of Strait of Hormuz drove oil and gas prices higher, intensifying inflation concerns

UBS Position: Chief Investment Officer Mark Haefele argues that current yield volatility creates an "appealing risk-return profile" for short- and medium-maturity quality bonds. The bank maintains a positive outlook on global equities, recommending diversified exposure across sectors and regions.

Central Bank Outlook: Markets are pricing in another Federal Reserve rate rise over the next year, with expectations that central banks may keep interest rates higher for longer. However, UBS expects the Fed to hold rates steady near-term while assessing inflationary pressures versus growth risks.

Fiscal Concerns: UBS believes government borrowing fears are manageable in major economies. The bank expects the UK to avoid aggressive spending that could destabilize bond markets, while Japan is anticipated to unveil fiscal consolidation plans within a month.

Investment Rationale: Despite softer US Treasury auction demand, foreign investors remain active buyers of long-dated debt. UBS argues that resilient economic growth should continue supporting corporate profits, noting that equity markets historically weaken only after sustained rate-rise cycles, not initial moves. The bank expects higher yields will soon attract fresh demand, helping stabilize markets.