US rates Duration preference: neutral US 10-year (29 June): 1.6% (last month: 1.7%) Recommendations UBS View US 10-year (6-month forecast): 1.8% Tactical (6 “ ¢ US 10-year yields have recovered slightly from their June 15* 2012 lows after a reduction of political risks pon * SES! esentum extension in the Eurozone. However, Treasury yields remain near historical lows due to the extension of Operation of Gperation Twist by the Fed and a risin Twist (OT) coupled with recent setbacks of domestic economic data. likelihood of a rate ot by the ECB. are g ¢ We expect a marginal rise in yields since the US economy remains on a moderate cyclical growth path likely to keep yields on eteanydinar les with the housing market having bottomed out. Additionally the diminished near-term risk of a Greek exit rewels for the time being. Thus we y from the Eurozone following elections supports a gradual rise in Treasury yields. suggest 4 Butea duration position ¢ However, over a six-month horizon, the extension of Operation Twist (OT) until the end of 2012 by the tactically Federal Reserve (Fed) will limit the upside potential in yields. As of late, the probability of even more ; stimulus in the form of quantitative easing from the Fed has risen substantially and markets have pushed Strategic (1 to 2 years) out the first rate hike expectation into 2015. Additionally, structural obstacles from the pending US fiscal ° Yields have significant upside potential consolidation will also limit the upside potential for yields. Further, the US economy seems more vulnerable over the next couple of years given the to possible spillover effects of increased political uncertainties in the Eurozone. current extraordinarily low levels — of real interest rates in particular. Thus clients A Positive scenario for US bonds US 10-year (6-month range): 1.5-1.7% with a longer time horizon should focus ¢ The European debt crisis further re-escalates. The resulting contagion would intensify the current flight to