Why a sudden rise in 10-year Treasury yields to around 1.5% shouldn’t scare investors off, according to BlackRock
Treasury yields suddenly shot up to relatively low levels because the government debt market was “late for a correction,” Jean Boivin’s team told the BlackRock Investment Institute, while stressing the rapid nature of the reboot. economy after pandemic shutdowns.
Bond prices fall as yields rise.
The rise last week in the 10-year Treasury yield TMUBMUSD10Y,
above 1.5% for the first time since June helped put pressure on struggling US stocks, with the S&P 500 SPX index,
recording the worst weekly percentage drop since late February.
Despite the shock, BlackRock’s strategy team viewed the sharp 10-year rate hike as the market catching up with the economic recovery from COVID-19, rather than a reaction to a “more hawkish pivot” from central bankers .
“We had argued since the spring that yields were too low given the restart of enlargement and that this would eventually be corrected,” Boivin et al wrote in a note on Monday.
“At the time, it took weeks for yields to rise about 20 basis points to hit the 1.50% level, and this time it only took a week, which highlights our view that the markets could catch up with the reality of the reboot. “
The attached chart shows how the rise in 10-year yields last week was due in large part to increased investor demand for a ‘term premium’ or compensation for holding government bonds longer. term, rather than a noticeable change in inflation expectations.
The chart also highlights how the term premium on 10-year government paper has been squeezed for much of the past decade.
“We see this as a more benign adjustment, and look at the ongoing negative real returns and the widening reboot supporting risky assets,” Boivin’s team wrote, adding that while bouts of volatility are greater. likely, “Higher term premiums in this environment shouldn’t be bad news for stocks.
The risky assets were sold on Monday, as the fight in Washington, DC intensified over the US debt ceiling and a planned $ 3.5 trillion infrastructure spending program. President Joe Biden warned in a White House speech that “a meteor is about to crash into our economy” unless lawmakers increase the federal borrowing limit.
Read: US Could Enter ‘Era’ Of High Inflation That Produces Poor, If Not Negative, Real Returns On Safe Assets, Analyst Warns
S&P 500 Information Technology SP500.45,
and SP500.50 communications,
both fell more than 2% in the afternoon share, while the Dow Jones Industrials Average DJIA,
was down around 1% and the Nasdaq Composite Index COMP,
was 2.4% lower. The 10-year Treasury yield was close to 1.488% at last check.
BlackRock’s recommendation is to “significantly underweight” government bonds, particularly longer maturities and broadly “risk-free” over the next six to 12 months, even with a “narrow path for assets at risk are pushing up, ”with a spike in US growth likely in the rearview mirror.
“You can only turn the lights back on once, so to speak,” the team wrote.