BlackRock increases allocation to short-term US Treasuries and lowers US stocks: "Rate hike bets have gone too far," high yields should be prioritized

Jinse Finance APP noted that the research department at BlackRock has shifted to a more bullish outlook on U.S. Treasuries, abandoning its underweight stance which had been the “main theme” for most of the past six years, as yields have risen to the highest levels in more than two decades.

BlackRock Investment Institute upgraded its rating on short-term U.S. Treasuries to “overweight” and raised its long-term Treasuries rating to “neutral,” citing rising yields and the possibility that market expectations of Federal Reserve tightening may be “overdone.” According to a report authored by strategists Jean Boivin, Wei Li, and Rick Rieder, BlackRock’s global chief investment officer of fixed income, the company also reduced its underweight position in Japanese government bonds.

To fund this shift, the company downgraded its rating on U.S. equities from a long-held “overweight” to “neutral,” citing potential volatility during the “AI buildout process.” It also lowered its view on U.S. agency mortgage-backed securities (MBS) to “neutral.”

U.S. bond losses continue to mount this month

This move marks a significant shift for BlackRock. The company first downgraded U.S. Treasuries in October 2020, when the 10-year yield was near 0.9%. Since then, as investors have grappled with stronger economic growth, robust capital demand, and renewed inflation concerns triggered by rising oil prices and tensions in the Middle East, this benchmark yield has surged above 5.2%.

The team wrote: “Today, yields have returned to the levels near our long-held view of higher rates, and we want to lock in some of these attractive yields.”

BlackRock is the latest major asset management firm to become more optimistic about fixed income after the sharp rise in yields. PIMCO senior investment portfolio advisor Rupert Harrison stated last week that the overall duration of the firm's bond portfolio “is as long as it has been in a very long time.”

BlackRock noted that market expectations for Federal Reserve rate hikes are now excessive, and if these bets are pared back, short-term U.S. Treasuries will be especially attractive. Interest rate swaps indicate that traders expect at least three 25 basis point hikes in the next 12 months.

BlackRock stated that at current levels, bond yields could rise by another 75 basis points in the next 12 months before all gains from U.S. Treasuries are fully offset and total returns turn negative.

The team emphasized that the move out of U.S. equities is mainly to manage short-term risk, rather than a shift in its long-term outlook.

The company’s confidence in the AI investment boom remains unchanged, and it continues to favor AI-related firms and publicly listed infrastructure assets. However, rising rates are increasingly distinguishing companies based on their ability to generate returns above the cost of capital.

The team wrote: “We are managing short-term risk, not changing our core convictions.” “We remain constructive on AI and are prepared to add risk again as visibility improves and attractive entry points emerge.”