What You Need to Know
- The downgrade is a tactical move that applies to portfolios over the next 6-12 months.
- It's based largely on expectations of rising inflation as economies continue their recoveries.
- The U.S. 10-year Treasury yield reached its highest level in a year.
BlackRock, the world’s largest asset manager, has downgraded government bonds to underweight for the next six to 12 months due to rising inflation expectations, which have already increased bond yields.
The 10-year U.S. Treasury yield topped 1.4% in early trading on Wednesday, reaching its highest level in a year.
“Inflation expectations have risen sharply while real rates [rates adjusted for inflation] are steady in negative territory,” according to the firm’s weekly commentary from the BlackRock Investment Institute headed by Jean Boivin. “We expect a strengthening economy, a huge fiscal impulse and rising inflation to further drive up nominal yields this year, albeit by less than in similar periods in the past.”
BlackRock strategists noted that “medium-term inflation risks look under-appreciated.”