The rise in US Treasury yields to their highest levels since 2002 has brought comparisons with 1999 back to the forefront, but UBS believes that fundamental differences in inflation, public finances and growth make today's market a very different case.
Ulrike Hoffmann-Borchardi, chief investment officer for UBS's Americas wealth management division, said: The 1999 parallel is constantly being cited as a framework for understanding current markets. The 10-year Treasury yield recently reached 5.34%, while the 30-year Treasury yield hit a session high of 5.69%. In 1999, as the dot-com bubble neared its peak, the 10-year Treasury yield soared to around 5.8%.
She noted that the structural drivers appear similar; the previous boom was fueled by telecommunications infrastructure, while today's landscape is driven by massive capital spending on AI data centers and the redesign of supply chains. Both eras also share the characteristics of high global capital costs and tight credit spreads.
However, the Federal Reserve faces a different situation today. The core consumer price index was 1.9% in 1999 compared to 2.4% currently, while the Fed's preferred measure of core personal consumption expenditures stands at 3%, further pressured by the energy price shock. Federal Reserve Chairman Kevin Warsh oversaw the raising of interest rates to a range of 3.75%-4% in September, due to inflation remaining high for an extended period.
On the fiscal front, the United States ran budget surpluses and repurchased 30-year Treasury bonds in 1999, making long-term securities scarce and putting pressure on term premiums. Today, deficits exceed 6% of GDP. As Hoffman-Borchardi wrote, “In 1999, long-term securities were scarce. Today, they are plentiful,” indicating that investors are now demanding a term premium to absorb this large supply. Real GDP growth was 4.8% then, compared to 2.2% today.
Ultimately, Greenspan reversed course and raised interest rates six times between June 1999 and May 2000, as demand outpaced supply. UBS does not believe the upcoming Federal Reserve meeting will mark the beginning of a sustained rate-hiking cycle, citing weaker growth and a labor market that has declined since 1999.
The markets agree with this assessment. The implied probability of an October rate hike fell to just over 20% by the end of last week, down from 70%, following more cautious comments from New York Federal Reserve President John Williams and weaker-than-expected September jobs data.
Hoffman-Borchardi explained that the Fed's pause in raising interest rates may not be enough to lower long-term yields if term premiums remain high. Addressing this situation without resorting to monetary tightening requires productivity-driven growth and periods of low real borrowing costs.
The analyst recommends maintaining investment in companies benefiting from AI-driven productivity, diversifying between stocks and high-quality fixed income, and favoring short-term bonds over long-term ones.
