UBS is planning a mass mailing to many of its brokerage clients alerting them that they have been reclassified as “aggressive” investors following a recent change in its market outlook that some people inside the firm say reflects growing bearishness in the bond market, particularly over the long term.
Some background: As part of the ‘know your customer rule’ brokerage firm’s clients fill out a form when they open a new account that describes their risk tolerance. Brokers tend to steer clients to check the ‘aggressive risk’ box to make it harder to pursue any future lawsuits from clients claiming they were seeking only ‘safety.’ The story that UBS is categorically changing all bond owning clients to ‘aggressive/risky’ status is the first time this has ever been tried as far as I know. UBS is trying to preempt legal actions invariably coming when interest rates start ticking up and bond prices collapse. In 1994, when rates ticked up, bonds dropped by 25% or so. Many analysts, myself included, are looking for a much higher rise (in percentage terms) for interest rates and a much sharper sell-off (50% or more). The big question now will be did UBS start the bond crash or try to hedge against a potential bond crash.