CIO's views on bond yields, equities, and balanced portfolios. (Shutterstock)

Is it time to lock in bond yields?

Bond yields have come off from their year-to-date highs as softer US economic data reignited hopes of Federal Reserve policy easing this year. The 10-year US Treasury yield has fallen to around 4.4% at the time of writing, from 4.7% in late April. We think yields can fall further this year as inflation slows, the US economy cools, and the Federal Reserve cuts rates. In our base case, we see the US 10-year yield declining to 3.85% by the end of the year.

We therefore recommend that investors lock in yields on quality bonds and recommend diversification against equity market risks. Investors can benefit from current attractive yields and potential capital gains if yields fall (as we expect). Beyond individual bonds, active and diversified fixed income exposure can provide investors with a convenient way to realize the full return potential of the asset class while managing global interest rate, credit, and concentration risks.

What's next for US equity markets?

The S&P 500 has recovered its April losses, helped by solid first-quarter earnings and lower bond yields. While a range of economic and geopolitical risks remain, we think solid economic and earnings growth, the likelihood that interest rates will still fall, and rising investment in AI should create a supportive backdrop for equities for the rest of this year. In our base case, we see the S&P 500 ending the year around 5,200, but think the index could rally toward our upside scenario target of 5,500 if we continue to get good news around inflation and AI spending.

We continue to favor quality stocks, and rate the US technology, health care, and industrials sectors as most preferred. We also see value in small- and mid-cap stocks.

Why invest in a balanced portfolio now?

Market sentiment has improved amid a positive first-quarter earnings season, but inflation, monetary policy, and geopolitical uncertainties remain. We continue to believe that holding a balanced portfolio—including equities, bonds, and alternatives—is the most effective way for investors to preserve and grow wealth over time.

We expect balanced portfolios to deliver positive returns this year, with potentially smoother returns thanks to diversification. A balanced and diversified approach can also help navigate fast-changing market narratives. We still see reinvestment risks to holding excess cash given our view that the Fed will likely ease policy by 50 basis points this year, with additional rate cuts likely in 2025.

Balanced portfolios can potentially lower swings in wealth. A portfolio with a 60/40 split between stocks and bonds has historically been less volatile than one composed solely of stocks. Indeed, a 60/40 portfolio has only delivered a negative return over a five-year horizon on 5% of occasions, and never over a 10-year horizon (compared with 12% and 5% of the time for equity-only portfolios).

Including alternative investments in balanced portfolios ensures investors tap more sources of return than just stocks and bonds. Investors considering alternative assets like hedge funds and private market investments should be aware of additional risks including illiquidity and longer lock-up periods.

For more, please see the UBS House View Briefcases.