BlackRock’s top bet is shunning sovereign bonds in all scenarios
THE chorus of buy calls on government bonds is growing louder but BlackRock begs to differ.
The firm’s top conviction is to avoid long-term sovereign securities as inflation will continue to outpace central bank targets. Policymakers will deliberately cause recessions by overtightening to rein in price gains, the world’s biggest money manager said.
“We are underweight nominal long-term government bonds in each scenario in this new regime,” vice chairman Philipp Hildebrand and his colleagues wrote in a report that examined four different market outlooks. “Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets.”
A record annual rout in Treasuries is forcing fixed-income investors to reassess their game plan for 2023 as some strategists warn that optimism about a peak in the rate-hike cycle may be premature. Market players are divided on the outlook, with the likes of Fidelity International and Jupiter Asset Management piling into bonds to counter the risk of a recession.
BlackRock’s call is based on the view that long-term government debt no longer fulfils its traditional role as a portfolio diversifier due to persistent inflation. Benchmark 10-year Treasury yields almost tripled from the year’s low to reach 4.34 per cent in October after the Federal Reserve jacked up rates aggressively to tame the highest inflation in four decades.
“We see investors demanding higher compensation for holding them as central banks tighten monetary policy at a time of record debt levels,” the report said, referring to long-term sovereign notes.
While central banks around the world try to slow price growth, BlackRock reckons long-term drivers such as ageing workforces would keep pressures above pre-pandemic levels. The firm favours inflation-linked bonds to protect its portfolio. BLOOMBERG
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