UBS Predicts 10-Year US Bond Yield to Hit 4.25% in 2025

What Happened

UBS released its latest forecast for the US bond market, predicting the 10-year Treasury yield will rise to 4.25% by the end of 2025, with the 2-year note yield reaching 3.65%. The firm highlighted near-term risks, particularly if core Personal Consumption Expenditures (PCE) inflation rises to 2.8% in Q1 before declining to 2% in Q3.

Why It’s Important

• Economic Growth: UBS expects US GDP to remain above trend until Q2 2025.
• Policy Uncertainty: President Trump’s early actions on tariffs, immigration, and Federal Reserve policies could heighten risks.
• Global Bond Markets: UBS believes the recent sell-off in UK gilts is overdone, forecasting UK short rates at 3.25% by year-end.

Market Implications

• Bond Market Risks: Yields exceeding 5% could become a concern for investors.
• Equity Market Impact: UBS projects a warranted equity risk premium (ERP) of 3.9%, supported by stable ISM/PMI data and credit spreads.
• Potential Market Bubble: UBS assigns a 35% probability to a market bubble forming, which could see price-to-earnings (P/E) ratios soar to 45 times in sectors comprising up to 40% of market capitalization.

Outlook

UBS suggests that if General AI technology enhances productivity by 1% starting in 2028, it could impact long-term ERP calculations. Additionally, corporate balance sheets—particularly in the tech sector—remain significantly stronger than government finances, potentially leading to a lower ERP.