The world's largest asset manager, BlackRock, has announced a major overhaul of its core positioning on US Treasuries and equities, formally ending a nearly six-year stretch of underweighting US government debt.
According to Bloomberg, the BlackRock Investment Institute has upgraded short-term US Treasuries to overweight, raised long-term Treasuries from underweight to neutral, citing attractive current yield levels and the possibility that market expectations for Federal Reserve rate hikes may be "overdone." At the same time, the firm downgraded US equities from a long-held overweight to neutral, and also cut US agency mortgage-backed securities (MBS) to neutral, in order to fund these shifts.
The adjustment comes as the 10-year Treasury yield has broken above 5.2%, a sharp climb from roughly 0.9% when BlackRock first went underweight on Treasuries in October 2020. BlackRock strategists Jean Boivin, Wei Li, and Global Chief Investment Officer of Fixed Income Rick Rieder wrote in a research report:
"Yields have now returned to the higher-rate environment we have long anticipated, and we want to lock in some of these attractive yields."
Nearly Six-Year Underweight Position Ends as High Yields Trigger a Turn
BlackRock first listed US Treasuries as underweight in October 2020, when the 10-year benchmark yield was only around 0.9%. Since then, as economic growth exceeded expectations, capital demand remained strong, and inflation worries reignited amid rising oil prices and Middle East tensions, the 10-year Treasury yield has continued to climb, now breaking above 5.2% to hit a more than two-decade high.
The BlackRock team said that at current yield levels, even if yields rise another 75 basis points over the next 12 months, the interest income generated by Treasuries would still be enough to offset price losses, keeping total returns from turning negative. This calculation provides quantitative support for its overweight on short-term Treasuries.
In addition, BlackRock believes the market has gone too far in pricing in Fed rate hikes. Interest rate swap data shows traders expect the Fed to raise rates at least three times over the next 12 months, by 25 basis points each time. BlackRock argues that once these bets are corrected, short-term Treasuries will benefit especially.
US Equity Downgrade Aimed at "Managing Near-Term Risk," Long-Term AI Thesis Intact
BlackRock downgraded US equities to neutral, mainly citing "potential volatility in the AI infrastructure buildout." The team explicitly stressed that this reduction does not change its long-term view on US stocks, but rather focuses on short-term risk management.
"We are managing near-term risk, not changing our core view," the team wrote in the report. "We remain constructive on AI and stand ready to re-add risk when visibility improves and attractive entry points emerge."
BlackRock said its conviction in the artificial intelligence investment wave remains unchanged, and it is still bullish on AI-related companies and listed infrastructure assets. However, as interest rates continue to rise, whether companies can generate returns above their cost of capital is becoming a key variable distinguishing individual stock performance.
BlackRock's shift is a microcosm of large asset managers collectively reassessing fixed-income allocations after a sharp rise in yields. Rupert Harrison, a senior portfolio consultant at PIMCO, said last week that the firm's overall bond portfolio duration is "at its longest level in a very long time."