Exposure to actively managed income strategies and yield-generating structured investments can help investors take advantage of the breadth of opportunities. (UBS)

Rates on cash have exceeded bonds, as central banks tackle inflation through monetary tightening.

  • Rate hiking cycles across major economies have left cash interest rates higher than bond yields.
  • US dollar cash currently earns around 115 basis points more annual income than investing in 10-year Treasuries at a yield of 4.25%.
  • In the UK, the 10-year gilt offers a yield of around 4.4% compared to the short-term interest rate of around 5.5%.

But bonds can beat cash as inflation and rates fall.

  • We expect slowing growth and inflation to mean a peak in central bank rates and falling bond yields (or rising bond prices).
  • CIO expects the 10-year UST yield to fall by about 100bps by end-June 2024 in the base case.
  • This move represents price appreciation of about 10% for high-quality bonds, likely beating cash.

Within bonds, we best like high-quality segments.

  • We prefer fixed income over equities in our global strategy.
  • We like opportunities in the 5–10-year duration segment in high grade (government), investment grade, and sustainable bonds.
  • Actively managed bond strategies may offer convenience, automatic reinvestment, and diversification, while managing dispersion across fixed income segments.

Did you know?

  • US government bonds have outperformed USD cash in 83% of five-year periods since 1925. If we look at all five-year periods since January 1977 (the earliest point with available data on a higher 2-year than 10-year Treasury yield, known as curve inversion), US government bonds have outperformed in about 90% of the time, and in 97% of five-year periods where the yield curve was inverted at the beginning of the five-year period.

Investment view

Investors now have a good opportunity to lock in currently elevated rates for an extended period. In fixed income, we like opportunities in the 5–10-year duration segment in high grade (government), investment grade (including select senior financial debt), and sustainable bonds. Exposure to actively managed income strategies and yield-generating structured investments can help investors take advantage of the breadth of opportunities.


Main contributors - Vincent Heaney, Matthew Carter, Christopher Swann


Original report - Why should I buy bonds now?, 8 September 2023.