Don't expect the back-end of the yield curve to climb much from here, UBS says

Key Points
  • Yields on government bonds rose last week, but the back end of the yield curve is not expected to climb significantly, according to a top executive at UBS Wealth Management
The inflation outlook for 2018 remains in check

Yields on key government bonds spiked last week, but don't expect a dramatically steeper yield curve anytime soon, according to UBS.

Benchmark 10-year U.S. Treasury yields rose to their highest levels since March last week on the back of a Bloomberg report — since disputed by Beijing — that China was looking at slowing its purchases of U.S. government debt.

Before that, news that the Bank of Japan had slightly reduced its purchases of longer-dated Japanese government bonds and steeper oil prices have also had a role in the climb higher in yields.

However, yields on longer-dated Treasurys might not have much room further to rise.

"We don't think that the back end of the curve is going to go up significantly from here," Mark Haefele, global CIO of UBS Wealth Management, told CNBC on the sidelines of the UBS Wealth Insights conference in Singapore.

"What you've seen is that inflation has picked up a little bit and we know that ... the Federal Reserve would like to hike rates and that's kind of caused this curve to flatten. But we don't see that dramatic rise in inflation or that tremendous pick-up longer term in growth that is going to make for a much steeper yield curve," Haefele added.

Tax reform 

And while it was "a long way" before markets knew the effect tax reform stateside would have on inflation, there would be a few near-term effects, according to Haefele.

"First, it's going to help corporate earnings and that is good for the market," he said.

The Republican tax bill signed into law last month saw the corporate tax rate slashed from 35 percent to 21 percent. Those lower rates are expected to be a plus for corporate earnings, although some companies will have to bear one-off charges due to changes in tax policy.

"And second, I think that investors and companies are looking ahead to the 2018 election and maybe thinking that the Republicans, which tend to be more business-friendly, can do well. So those two factors have contributed to some of the gains we've seen at the beginning of the year," Haefele added, referring to upcoming midterm elections in the U.S.