The beauty of a mortgage is that borrowers can refinance but lenders can't, UBS says.

Have the 2%-and-change yields we’ve seen on 10-year Treasuries whetted your appetite?

If not — and yields were not even 2% as recently as April — then logic should dictate your desire to take the other side of the trade.

That is, you should want to borrow that money cheaply since you don’t want to lend it for such a pittance.

But that cold, hard logic does not always hold sway when it comes financial decisions is one of the key insights UBS offers in its new second-quarter client communique Your Wealth and Your Life, whose theme this quarter is how to properly leverage a balance sheet.

“Our brains are not wired to think optimally when it comes to decisions involving debt,” write UBS portfolio and planning experts Michael Crook, Brian Rose, Andrea Fisher and Matt Baredes.

Investment analysis is often dressed up in the guise of mathematical rigor. But, citing research by behavioral economist Richard Thaler, investor behavior lacks the predictability of physical forces such as gravity. A body in motion will fall, but a human being will fail … to rationally optimize his financial outcome, perhaps out of fear or shame.

Indeed, a university study cited by the UBS team attests that human beings are psychologically resistant to taking on debt even when borrowing would be the optimal behavior.

A second study — this one a UBS survey of investors — refines that view of debt aversion, showing that investors perceive “good debt” and “bad debt,” with a mortgage on a primary home and a student loan seen as the best kind of debt.

Even though people grasp that such borrowing is proper and prudent, such is our debt aversion that it still doesn’t “feel good.”

In contrast, borrowing from family and friends and credit card balances that are not paid off each month are seen as the worst on a menu of debt options.

Culturally, too, the subject of debt tends to be sidelined. Turn on CNBC and you’re far more likely to hear about assets such as stocks and bonds, commodities or real estate.

But as UBS frames the matter, debt is one of two co-equal sides of a balance sheet and as such merits a rational analysis as to its place in investors’ portfolio — all the more so at a time when the cost of borrowing is at historic lows.

UBS does not advocate using debt to live beyond one’s means, using margin to leverage an investment portfolio or taking on high-cost debt such as credit-card or car loans.

Rather, the wealth management firm says investors should leverage debt to diversify rather than amplify risk, particularly high-net-worth households whose balance sheets have the capacity to do so.

Modern portfolio theory, while based on rationalist rather than behavioralist assumptions, nevertheless provides a useful theoretical understanding of how this works as it is well established that diversification can bring higher risk-adjusted return.

“An aggressive investor can hold a portfolio concentrated in equity or hold a moderate portfolio that’s been leveraged to the same risk as the riskier option,” write the UBS authors, pointing out that investors would be better served with the leveraged moderate portfolio that can “increase return expectations without adding risk.”

The impetus for UBS’ Q2 report is the Federal Reserve’s signaling of its intentions to start raising rates, currently at 50-year lows.

The Fed has cautioned it will raise rates only gradually, and UBS’s own forecast calls for a quite moderate federal funds rate of just 2.5% in five years, meaning today’s favorable borrowing conditions are likely to persist in UBS’ view.

But the key takeaway of the UBS analysis is that, logically speaking, conditions are ripe for balance-sheet leveraging:

“Many investors find borrowing rates attractive for the same reasons they find bonds unattractive right now. A greater willingness to borrow is a logical counter-response to underweighting bonds in a portfolio since the investor is effectively taking advantage of low interest rates to issue debt from his or her own balance sheet. Similarly, if rates rise, the marginal benefit of various liability strategies will correspondingly decline. The overall value of debt will likely decline as the Fed normalizes interest rates.”

The wealth management firm outlines four principles that should apply in balance-sheet leveraging.

First, investors must rerun their personal financial plan prior to assuming any new debt, looking at tax impact, liquidity and the cost of debt relative to expected return.

Second, it is imperative that they maintain control of borrowing through duration matching.

“History is full of devastating examples of investors and firms that ‘borrowed short and invested long,’” the authors write.

Borrowers stay in control through duration matching — that is, “locking in the terms of borrowing for at least as long as the investor expects to hold the associated asset if it is illiquid in nature.”

Found an irresistible 2% rate on a 30-year adjustable-rate mortgage loan? That would be appropriate if you know you’re going to sell the home in two years.

Another way to stay in control, fundamentally, is by having the necessary liquidity to pay off debt if needed. This is why debt leverage is generally suitable for high-net-worth households with strong balance sheets, though even still UBS cautions such investors leveraging their strong balance sheets through short-term financing — because of the danger of “ending up on the wrong side of this trade.”

The third principle of debt leverage is to manage the debt proactively, by which the authors mean: be alert to refinancing opportunities.

“Because homeowners can refinance a mortgage without penalty but the lender cannot do the same, holding a mortgage is essentially like issuing callable bonds. If rates decline, the homeowner can simply refinance and take advantage of lower borrowing costs. If rates increase, the homeowner can hold the mortgage through the full term and take advantage of below market rates of borrowing,” the authors write.

UBS says the fourth and final principle may be the most important, which is to use debt for diversification rather than as a means of amping up returns.

Thus, a business owner who has 80% of her assets tied up in the business, or likewise a young med school grad with 80% of his assets in human capital could diversify balance sheet risk by buying a first home.

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