The 59-year-old, who trained the Bundesliga leaders for three years between 2004-2007, says that the team is playing better than it ever has done before, and he praised both current coach Jupp Heynckes and his predecessor Louis van Gaal for their work.
"After Barcelona's defeat at Milan you have to assume they are [the best side in Europe]," he told Die Welt.
"I am convinced they will reach the Champions League final. They are playing better than ever before.
"In any case, I have never seen them better. They have been able to play on that level since the start of the season. If they continue to keep it up chances are good that they can win the title.
"Jupp Heynckes does a great job. Without diminishing his work, I believe, the current shape Bayern are in, the extreme position play is down to Louis van Gaal. The club profits from the work he has done.
"Heynckes has taken on the structures and elaborated them, that is as important and valuable."
Magath also speculated about the future of the club under Pep Guardiola. The former Barcelona trainer takes over in Bavaria at the end of the season, but the former Germany international feels he could struggle to take the team much further.
He added: "FC Bayern have hired a top man, but expectations will be enormous. This can also turn out to be a problem if expectations are fuelled which, as they are too high, he has to fall short of.
"When I say Bayern play better than ever before, [I ask] how could Guardiola make them better? And just imagine if Jupp Heynckes wins three titles. There'd be none left for Guardiola."