Favor bonds over stocks – with 10-year Treasurys set to shake off the market meltdown and deliver double-digit returns, UBS says

• Investors should load up on bonds despite fixed income's recent struggles, according to UBS.
• Longer-term Treasurys have been routed in recent months in a meltdown that ranks among the worst market crashes ever.
• But 10-year yields will drop to 3.5% over the first half of 2024 as growth slows and the Fed winds down its tightening campaign, the Swiss bank said.

Investors should be eyeing up bonds rather than stocks despite the market meltdown that's led to fixed-income prices cratering in recent months, according to UBS.

The Swiss bank said Monday that it expects the key 10-year US Treasury yield to fall from it's current level of 4.7% to just 3.5% over the first half of 2024, which it estimated would net bondholders returns of around 13%.

"Looking ahead, we expect yields to fall as US growth slows and the Federal Reserve finishes tightening and starts to ease policy later next year," a team of strategists led by UBS Global Wealth Management CIO Mark Haefele said in a research note seen by Insider.

"We see bonds as an effective hedge to investor portfolios," they added, noting that the 10-year could deliver returns as high as 19% in a scenario where the US economy falls into a recession.

The strategists said they hold a "neutral view" on equities, predicting that the benchmark S&P 500 stock-market index will edge up just 4% between now and June 2024.

UBS's bullish view on bonds comes with the sector mired in a slump that ranks among the worst market crashes ever.

Longer-duration debt prices have cratered nearly 50% since March 2020 and 30-year yields spiked above 5% two weeks ago, before retreating as investors' worries about a potential conflict between Israel and Iran boosted the appeal of safe-haven assets.

UBS's base case is that yields – which move in the opposite direction to prices – continue to slide as a slowdown in US growth makes bonds even more attractive.

They're also expecting the Federal Reserve to wind down its war on inflation over the first half of next year. When interest rates stop rising, bonds tend to benefit because they offer better relative returns for investors than parking cash in a savings account.

The bank is more cautious on stocks worldwide.

"We hold a neutral view on global equities. While we see upside potential over our forecast horizon—8% for the MSCI All Country World Index by June 2024 in our base case—uncertainty about the monetary policy outlook may keep markets range-bound and choppy for now," the strategists wrote.

"In our downside scenario of a recession, global stocks could fall 16% by June 2024. But for diversified investors, we would expect this decline to be offset by performance in bonds as markets move to price swifter Fed rate cuts. Meanwhile, in our upside scenario of a positive surprise in economic growth, global stocks could rally by 16%," they added.