Carnage in the bond market in September could tee up an opportunity for investors to earn big returns on U.S. government debt in a year. Owners of 10-year Treasury
notes at recent yields of around 4.5% could reap up to 20% in total returns in a year if the U.S. economy stumbles into a recession, according to UBS Global Wealth Management.
The key would be for U.S. debt to rally significantly as investors scramble for safety in the roughly $25 trillion treasury market. “U.S. yields remain well above long-term equilibrium levels, providing scope for them to fall as the macroeconomic outlook becomes more supportive for bonds,” a team led by Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, wrote in a Friday client note. Their base-case call is for the 10-year Treasury yield to fall to 3.5% in 12 months, with it easing back to 4% in an upside scenario for growth, and for the economy’s benchmark rate to tumble as low as 2.75% in a downside scenario of a U.S. recession. “That would translate into total returns over the period of 14% in our base case, 10% in our upside economic scenario, and 20% in our downside scenario.” See: The market ‘may be overpaying you’ on a 10-year Treasury, says Lloyd Blankfein A rally in Treasury debt could help boost funds that track the Treasury market and the broader U.S. bond sector. The popular iShares 20+ Year Treasury Bond ETF