US rates Duration preference: neutral US 10-year (24 Oct): 1.8% (last month: 1.8%) Recommendations UBS view US 10-year (6-month forecast): 2.0% Tactical (6 th e US 10-year yields traded largely sideways within a narrow range. Improving domestic economic and sentiment data actical (6 months) ; was balanced by concerns of the elections/fiscal cliff weighing on the US economy. However, both the ECB and the ¢ Weak global growth momentum, ongoing Fed have provided substantial and credible backstops that significantly reduce tail risks. This reduces the flight to bond market support from central banks quality and the risk discount placed on Treasuries in the event of a re-escalation of the European debt crisis. This and the lingering euro crisis are likely to oe : Te 4 AB te “An represents a clear floor with little chance of retesting the historical lows of July (- 1.4%). In addition, the Fed s keep yields at extraordinarily low levels for willingness to fall behind the curve in support of the domestic labor market will increase inflation expectations over ti Tactical ‘ dal the medium term. This implies steeper yield curves. SOME IS ac Ie Uys WE SUDGESE 8 NEUES * In addition, the credible and conditional central bank backstops have already improved sentiment and should help duration position. to kick-start growth if politicians provide the necessary tailwinds. Yields will then return to their slightly higher, previously stable ranges over a six-month horizon (1.8%-2.1%). Strategic (1 to 2 years) e At the same time, US yields should be capped, as the US economy continues to be vulnerable to spillover effects ° Yields have significant upside potential from the Eurozone. Structurally weak growth which will be dampened by the upcoming US fiscal consolidation, will © the Hest ‘ % given th add to volatility and limit the increase in yields. Ove: sf ex cGUple Or Veale Qe e extraordinarily low current levels of real 4 Positive scenario for US bonds US 10-year (6-month range): 1.4