As the dust settles on Labor Day, Wall Street’s focus remains firmly fixed on the recent jobs report, which presented a somewhat paradoxical picture of a slowing labor market that is yet to plunge into a recession. This Goldilocks-like scenario, characterized by a labor market that is neither too hot nor too cold, has raised questions about the sustainability of current trends, with particular attention being paid to the S&P 500 earnings yield. Analysts from BMO have noted that this yield, which reflects earnings-to-price rather than price-to-earnings, now barely surpasses the yield on the 10-year Treasury.

In the midst of this uncertainty, the UBS team, led by Mark Haefele, Global Wealth Management Chief Investment Officer, maintains a bullish stance on bonds. Contrary to fears of a looming bear market for bonds, they believe that nominal yields will decrease over the next six to twelve months. This prediction is based on several factors, including current restrictive monetary policy, falling inflation rates, and the enduring appeal of the U.S. Treasury market as a safe haven for capital. The UBS team’s optimistic outlook on bonds aligns with that of the BMO team, who are targeting the mid-August low in the 10-year of 3.95%.

Optimistic Outlook on Bonds Despite Slowing Labor Market

As we officially draw the curtains on summer, Wall Street’s focus remains on last Friday’s jobs report, which indicated a slowdown in the labor market that has not spiraled into a recession. The S&P 500 earnings yield is just above the 10-year Treasury yield, leading analysts to ponder how long this dynamic can persist before reverting to historically typical levels. According to analysts at BMO, this could mean higher earnings yields or lower 10-year yields.

Bullish on Bonds

UBS analysts, led by Mark Haefele, global wealth management chief investment officer, are bullish on bonds, contrary to concerns about a potential bear market for bonds. The team cites several reasons for this positive outlook. First, they believe that the current monetary policy is restrictive, with inflation-adjusted interest rates at levels unseen since the 2008 financial crisis.

Factors Supporting Bond Optimism

The UBS team also observes falling inflation rates, with housing inflation cooling down and goods inflation turning negative in July. They maintain that the U.S. Treasury market hasn’t lost its safe-haven appeal, indicating that it will continue to attract capital. They also dismiss the recent recalibration of the Bank of Japan’s yield-curve control as a precursor to higher global term rates.

Opportunities in Bonds

The UBS team identifies the most promising opportunities in the 5-to-10 duration segment of government bonds, investment-grade corporate bonds, and sustainable bonds. Meanwhile, U.S. stock futures were slightly weaker as the yield on the 10-year Treasury rose.

Other Market Updates

In other financial news, China property giant Country Garden made two overdue bond payments before the end of a 30-day grace period. Microchip designer ARM Holdings is aiming to price its initial public offering between $47 and $51 per share, thereby raising up to $4.9 billion.

Takeaways

The positive outlook on bonds, despite the slowing labor market, highlights the resilience and adaptability of financial markets. The UBS team’s bullish stance on bonds is backed by several solid reasons, including restrictive monetary policy, falling inflation, and the enduring appeal of the U.S. Treasury market as a safe haven. This analysis underscores the importance of considering multiple factors when making investment decisions and reveals potential opportunities in different bond segments. This development also highlights the need for investors to stay updated on market dynamics to make informed decisions.