News

BlackRock Predicts Even Higher Treasury Yields

4.4

Andrew R. Michaud

September 25, 2023

The benchmark 10-year Treasury yield has reached a fresh 16-year high above 4.5%, and BlackRock Inc., the world's largest asset manager, believes it could go even higher.

According to BlackRock's in-house research arm, financial markets are shifting towards the expectation that rates will remain high. This comes amidst a volatile macro regime that has brought uncertainty over central bank policies and future risks.

In response to this upward trend, long-term government yields across the Americas and Europe have seen significant increases. The Federal Reserve and other central banks have communicated a message indicating that interest rates will stay elevated for an extended period. European Central Bank President, Christine Lagarde, recently stated that borrowing costs will remain high for as long as necessary. Similarly, the Swiss National Bank continues to monitor inflation pressures and is committed to combatting inflation. The Bank of England has also kept its main policy rate at 5.25%, aligning with the expectation of higher rates in the long run.

The benchmark 10-year Treasury had a momentary spike of 9.4 basis points on Monday, reaching an intraday high of 4.53%. It later settled around 4.51%, still poised for its highest close since October 17, 2007. The trajectory of the 10-year rate mirrors that of the Federal Reserve's main interest-rate target, bringing it back to levels seen in the early 2000s and prior.

With BlackRock's prediction of potentially even higher Treasury yields, investors need to brace themselves for continued market adjustments.

Markets Reacting to High Rates and Increased Volatility

According to Jean Boivin, head of the BlackRock Investment Institute, and others, the markets are beginning to align with the belief that interest rates will remain high, and potentially surpass initial expectations in Europe. The rise in long-term bond yields indicates that the markets are adapting to the risks associated with this new regime of increased macro and market volatility.

Underweight Outlook on U.S. and European Equities In a note released on Monday, Boivin and his team expressed their tactical view over the next six to twelve months, suggesting a continued underweight position on both U.S. and European equities. Their reasoning stems from the belief that current earnings expectations do not accurately reflect the anticipated macro damage.

Divergence in Treasury Investing While many investors have been bullish on long-dated Treasuries, enticed by the attractive yields, BlackRock has refrained from joining the chorus. Their long-standing underweight position in long-term U.S. Treasuries has proven beneficial as yields continue to climb. Although the markets have aligned with their view on policy rates, there is still minimal term premium. As a result, BlackRock favors short-term Treasuries due to comparable income and lower credit and interest-rate risks compared to high-quality credit.

Impact on Financial Markets

The ongoing increase in yields had a notable impact on the financial market on Monday. The DJIA, SPX, and COMP, all major U.S. stock indexes, experienced a lack of momentum after initially opening lower. Meanwhile, the ICE U.S. Dollar Index (DXY) rose by 0.4%.