Less than two weeks after it recommended that advisors include fewer bonds in client portfolios, BlackRock has downgraded nominal U.S. Treasurys to an underweight, and upgraded Treasury inflation-protected securities (TIPS) due to the growing odds of a Democratic sweep.
Such an election outcome may lead to a “significant fiscal expansion” along with higher inflation, putting upward pressure on interest rates, according to BlackRock Investment Institute strategists led by Mike Pyle, its global chief investment strategist.
The Fed’s new monetary policy framework allowing inflation to temporarily top its 2% target may work to constrain its “ability to lean against inflation,” according to the strategists’ weekly commentary report.
Long-term interest rates had been rising over the past week in line with growing expectations that Democrats will win the presidency and the Senate, and that Democrats and Republicans would reach agreement on another economic aid package. But hopes for another stimulus package evaporated on Monday, and its demise, along with rising rates of COVID-19 infections, sent the 10-year Treasury yield down to 0.80% from an intraday high of 0.85% on Friday.
COVID-19 infections in the U.S. set a new daily record on Friday of 85,000 and a record seven-day average of about 68,767 new cases on Monday.