BlackRock increases short-term US debt and cuts US stocks: “Interest rate hike bets have gone too far” and should lock in high returns

The Zhitong Finance App notes that BlackRock's research department's opinion on US bonds has changed to more, abandoning the low allocation position that has been the “main tone” for most of the past six years because the yield has climbed to the highest level in more than 20 years.

BlackRock Investment Research raised the rating of short-term US bonds to “increase holdings” and raised long-term US bonds to “neutral,” due to rising yields and the possibility that the market's expectations of the Federal Reserve's tightening were “excessive.” According to reports written by strategists Jean Boivin, Wei Li, and BlackRock's chief global fixed-income investment officer Rick Reed, the company also cut its low position on Japanese treasury bonds.

To fund this shift, the company downgraded the US stock rating from long-term “excess holdings” to “neutral,” citing “possible fluctuations in the AI construction process.” It also downgraded US institutional mortgage-backed securities (MBS) to “neutral.”

US bond losses continued to rise this month

The move marks a significant shift for BlackRock. The company “reduced” its holdings of US bonds for the first time in October 2020, when the 10-year yield was close to 0.9%. Since then, this benchmark yield has soared above 5.2% as investors respond to stronger economic growth, strong demand for capital, and concerns about inflation raised by rising oil prices and renewed tension in the Middle East.

The team wrote, “Now that yields are back close to our long-held view of higher interest rates, we want to lock in some attractive gains.”

BlackRock is the latest major asset management company to switch to more optimistic about fixed income after a sharp rise in yield. Rupert Harrison, senior portfolio advisor at PIMCO, said last week that the company's overall bond portfolio was “long-standing and rare in a long time.”

BlackRock said that the current market's expectations for the Fed's interest rate hike are too much. If these bets are cut, short-term US bonds will be particularly attractive. Interest rate swaps show that traders expect interest rate hikes of 25 basis points at least three times in the next 12 months.

BlackRock said that at the current level, bond yields can rise by another 75 basis points in the next 12 months, so that the income earned on US bonds will be completely offset and the total return turned negative.

The team emphasized that withdrawing from US stocks was more about managing short-term risk than changing its long-term outlook.

The company remains confident about the AI investment boom and continues to be optimistic about AI-related companies and listed infrastructure assets. However, rising interest rates are increasingly distinguishing businesses based on whether they can generate returns above the cost of capital.

“We're managing short-term risk, not changing our core beliefs,” the team wrote. “We remain constructive about AI and are prepared to increase risk again as visibility improves and attractive entry points emerge.”