BlackRock Institute: 80% of global bond yields exceed 4%? Diversified sources of income in the new interest rate landscape

According to the Zhitong Finance APP, on July 4th, BlackRock's think tank published an article stating that after the global financial crisis, central banks around the world significantly lowered interest rates to near zero or even negative levels and purchased bonds, leading to a continuous decline in bond yields. In this market environment, it has been difficult for investors to obtain returns unless they take on the investment risks of long-term bonds. However, the current situation is completely different. As shown in the chart below, current interest rates have stabilized above pre-COVID-19 levels, with approximately 80% of global fixed-income asset yields exceeding 4%. This makes assets such as credit bonds, mortgage-backed securities, and emerging market bonds more attractive.

BlackRock mentioned that this year, we have seen significant developments in the bond market. Despite considerable volatility in the stock market, credit spreads have remained stable overall. At the same time, current investors are demanding more compensation for the risks associated with holding long-term bonds, which has caused the global yield curve to steepen. Relevant data shows that the yield spread between the 5-year and 30-year U.S. Treasury bonds has more than doubled this year, reaching the highest level since 2021.

BlackRock is optimistic about the diversified income opportunities in bonds, but considering the risks to fiscal sustainability, it maintains a strategy of selecting preferred bonds, favoring medium- and short-term government bonds, U.S. agency mortgage-backed securities, internationally issued bonds hedged against exchange rates, and local currency bonds from emerging markets.

There are abundant opportunities to earn returns currently. Given that bond yields are close to 4%, BlackRock is optimistic about medium- and short-term government bonds. The market expects that the Federal Reserve may cut interest rates multiple times in the coming year. Although the likelihood of the Federal Reserve raising rates again is low, persistently high inflation will limit its room for rate cuts.

Due to the lack of fiscal discipline by the U.S. government and persistently high inflation, BlackRock maintains a cautious stance on long-term bonds, preferring medium- and short-term bonds. However, BlackRock believes that long-term bonds may occasionally experience significant rebounds. Relevant data shows that the U.S. is currently issuing nearly $500 billion in bonds weekly to fill the ongoing budget deficit.

The U.S. Congressional Budget Office predicts that the "Inflation Reduction Act" will only exacerbate the deficit in the short term. As BlackRock pointed out in its "Mid-Year Investment Outlook 2025," the U.S. needs stable overseas funding to maintain the sustainability of its debt, while trade tensions may weaken overseas investors' demand for its bonds.

BlackRock is closely monitoring the market's ability to absorb a large amount of newly issued government bonds. The issue of fiscal sustainability is not unique to the U.S.; due to policymakers proposing tax cuts ahead of the Senate elections on Sunday, Japan's 30-year government bond yield reached a record high last week.

The high policy interest rates in the U.S. mean that the interest rate spread between the U.S. and other countries remains elevated, resulting in a wealth of investment opportunities in the global fixed-income market. This is because hedging overseas bonds back to U.S. dollars can enhance yields. Some Eurozone bonds, such as Spanish bonds, have yields exceeding 5% after currency hedging, higher than the yields of comparable U.S. bonds Credit bonds have become the best choice for allocating quality assets. Despite facing uncertainties regarding tariffs, corporate balance sheets remain robust underpinned by economic resilience. Therefore, although current credit spreads are at historical lows, credit bonds still hold appeal. Relevant data shows that the default rate for U.S. high-yield credit bonds is currently only about half of the average level over the past 25 years. Given the more stable fiscal outlook in Europe, there is a more favorable view on European fixed-income assets compared to the U.S., especially European bank bonds, due to their strong financial profitability and immunity to tariff policies.

BlackRock stated that a selective strategy is adopted for assets across different regions and within a specific region. BlackRock holds an overweight view on U.S. agency mortgage-backed securities, as their spreads are above historical averages, and it is expected that some investors may shift from U.S. long-term Treasury bonds to such assets. This month, BlackRock upgraded the rating of emerging market local currency bonds to neutral, as they have withstood the test of changes in U.S. trade policy, and debt levels have also improved