BlackRock's research division has turned more bullish on US Treasuries, abandoning the underweight stance that served as its "baseline" for most of the past six years, as yields have climbed to their highest levels in more than two decades.

BlackRock Investment Institute upgraded short-term US Treasuries to "overweight" and raised long-term US Treasuries from underweight to "neutral," citing rising yields and the possibility that market expectations for Federal Reserve tightening are "excessive."

According to a report authored by strategists Jean Boivin, Wei Li, and BlackRock Global Chief Investment Officer of Fixed Income Rick Rieder, the firm also trimmed its underweight position in Japanese government bonds.

To fund this shift, the firm downgraded US equities from a long-held "overweight" to "neutral," citing "potential volatility during the AI buildout." It simultaneously downgraded US agency mortgage-backed securities (MBS) to "neutral."

Mounting US bond losses this month

This move marks a notable pivot for BlackRock. The firm first "underweighted" US Treasuries in October 2020, when the 10-year yield was near 0.9%. Since then, this benchmark yield has surged to above 5.2% as investors grapple with stronger economic growth, robust capital demand, and inflation concerns reignited by rising oil prices and renewed Middle East tensions.

The team wrote: "Now that yields have returned to near our long-held view of higher rates, we want to lock in some attractive income."

BlackRock is the latest major asset manager to turn more favorable on fixed income after the sharp rise in yields. Rupert Harrison, a senior portfolio advisor at PIMCO, said last week that the firm's overall bond portfolio has "a duration longer than we've had in a long time."

BlackRock said current market expectations for Fed rate hikes have gone too far, and short-term US Treasuries would be particularly attractive if those bets are scaled back. Interest rate swaps show traders expect at least three 25-basis-point hikes over the next 12 months.

BlackRock stated that at current levels, bond yields could rise another 75 basis points over the next 12 months before the income earned on US Treasuries is fully offset and total returns turn negative.

The team emphasized that the exit from US equities is more about managing short-term risk than changing its long-term outlook. The firm's confidence in the AI investment boom remains unchanged, and it continues to favor AI-related companies and listed infrastructure assets. However, rising rates are increasingly differentiating companies based on whether they can generate returns above their cost of capital.

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