Albuminuria and a reduced glomerular filtration rate are conventional predictors of a future decline in kidney function in patients with type 2 diabetes mellitus. Using a nested case-control study we assessed whether circulating transforming growth factor-β1 (TGF-β1) and bone morphogenetic protein-7 (BMP-7) levels more accurately predict renal end points than the conventional markers. Cases were defined as those who developed a renal end point (doubling of serum creatinine to at least 200 μmol/l, the need for renal replacement therapy, or death due to renal disease) during the study. Using propensity scoring, two controls were selected for each of 281 cases. Participants who developed renal end points had significantly higher total TGF-β1, lower BMP-7 levels, and a higher total TGF-β1 to BMP-7 ratio at baseline. A graded increase in risk was found in individuals with lower BMP-7 levels (odds ratio 24.07, for the lowest to the highest tertile), or significantly higher TGF-β1 levels (odds ratio for the highest to the lowest tertile, 8.43). The area under the receiver operating characteristic curve (c-statistic) for the conventional predictors was 0.73. Using BMP-7 and total and active TGF-β1, the c-statistic was 0.94 (significantly higher to conventional predictors). Thus, our results suggest these novel kidney markers are better predictors of renal progression than the conventional predictors in patients with type 2 diabetes mellitus. © 2012 International Society of Nephrology.