BlackRock: Expects bond yields to rise, continues to underweight long-term U.S. Treasuries

According to Zhitong Finance APP, BlackRock believes that the biggest risk to U.S. economic growth is long-term policy uncertainty. Although U.S. stocks may face more pressure in the short term, BlackRock maintains an overweight tactical view. Given the expectation of rising yields, BlackRock continues to underweight long-term U.S. Treasuries. In the past, even with a heavy government debt burden, investors considered the risks of long bonds to be low because they believed that a low inflation and low interest rate environment would persist. However, this fragile balance has now been disrupted. Germany plans to increase fiscal spending, reinforcing BlackRock's view that interest rates will remain high in the long term and that global bond yields will rise. In this environment, gold may be a more ideal diversification tool compared to U.S. Treasuries.

Since reaching a peak in February of this year, the S&P 500 index has fallen by 8%, with a year-to-date decline of 4%, as investors worry that changes in U.S. policy could impact economic growth, which has been a key factor in the strong performance of U.S. stocks. However, from a fundamental perspective, economic data does not point to a recession in the U.S. As shown in the chart below, although U.S. job growth has slowed since 2022, it remains above BlackRock's expected long-term level due to an aging workforce. Relevant data shows that U.S. corporate earnings expectations and high-frequency data measuring consumer health, such as weekly credit card spending, also remain robust. However, in the short term, U.S. economic growth still faces risks, and policy uncertainty may impact consumer spending, investment, and trade. The longer the policy uncertainty persists, the greater the impact on economic growth, but this is not absolute. U.S. policies are stimulating government spending in other regions, which also validates BlackRock's view that developed market policy rates and bond yields will be significantly higher than pre-pandemic levels.

BlackRock Think Tank believes

The market is also questioning the strong performance of U.S. stocks, especially technology stocks, as concerns about a U.S. recession have once again triggered declines in tech stocks. Since reaching a peak in February of this year, the Nasdaq index has fallen by 11%, marking the largest pullback since the U.S. stock market crash in 2022. However, from a tactical perspective over the next 6 to 12 months, BlackRock continues to hold an overweight view on U.S. stocks. Relevant data shows that U.S. corporate earnings expectations remain robust, with an expected earnings growth of 12% for the S&P 500 index this year, down from 14% last September. The technology sector's corporate profit margins, earnings, and revenue expectations remain strong, and it is still expected to be the fastest-growing sector this year. Additionally, the free cash flow of the technology sector accounts for 30% of total sales, reaching the highest level since 1990, indicating strong momentum at present.

U.S. policy uncertainty and the crowded positions of investors selling have exacerbated recent volatility in U.S. stocks. For example, last week, investors quickly exited some popular trades, such as momentum stocks primarily in the technology sector, resulting in the largest decline since the pandemic These two factors may lead to increased volatility in the U.S. stock market in the short term. However, over time, deleveraging will come to an end, and the uncertainty of policies is expected to dissipate with the announcement of more implementation details, such as the White House's comprehensive tariff plan to be released in April. At that time, the risk premium currently demanded by investors due to extreme uncertainty may be reabsorbed by the market.

Long-term U.S. Treasury bonds can temporarily mitigate the impact of a decline in the stock market. However, since the pandemic, the role of these assets in diversifying portfolio risk has weakened. BlackRock believes that as investors demand more risk compensation for holding long-term bonds, bond yields may rise. Recent inflation data remains unstable, but core CPI is still above the Federal Reserve's 2% target level. This situation limits the extent of the Federal Reserve's interest rate cuts. Even with potential tax revenue and spending cuts, the U.S. fiscal deficit may still rise, which could also lead to higher term premiums