Having long argued that reliable diversifiers are becoming increasingly rare, the asset manager has said the recent rise in developed market bond yields confirms its thesis.
As markets anticipated the US Federal Reserve (Fed) cash rate decision earlier this month, Treasury yields continued to move higher – a highly unusual reaction given the Fed’s ongoing rate-cutting path.
While explanations for the surge have differed, BlackRock said it sees the spike as further proof that long-term bonds are no longer reliable portfolio diversifiers.
Speaking in the firm’s weekly video, BlackRock portfolio strategist Natalie Gill attributed the surge to “heightened concerns around loose fiscal policy and deteriorating fiscal outlooks”.
She said it illustrates the “diversification mirage” – a thesis BlackRock argues where economic transformation mega-forces are challenging traditional diversification strategies.
“Trying to diversify away from the US or the AI [artificial intelligence] mega force towards other regions or equal-weighted indices amount to larger active calls than before.
“In fact, our analysis shows that – after accounting for factors that typically explain equity returns – a growing share of US stock returns are tied to a single, common driver,” Gill elaborated.
When BlackRock announced that reliable diversifiers were becoming “scarcer in a changing world” back in September, market experts were split on the statement’s accuracy.
Betashares investment strategist Tom Wickenden called BlackRock’s statement “valid” but noted that bonds can still play their traditional role as portfolio diversifiers during negative economic shocks. Meanwhile, AMP chief economist Shane Oliver told InvestorDaily that truly reliable diversifiers have always been scarce, arguing that cash in safe countries remains the only consistently dependable option.
BlackRock has since reiterated the idea in its 2026 investment outlook, adding that with such few mega forces driving returns, apparent diversification can actually amount to a single large directional bet.
“Markets are more concentrated, so underweighting AI has been costly and any benefit from that if the theme falters may be small,” the firm stated.
In this week’s video, Gill again emphasised the importance of an active approach.
“We think investors should focus less on spreading risk indiscriminately and more on owning it deliberately,” she said, adding that finding “truly unique return sources” is still possible in private markets and hedge funds.
“We also think portfolios need a clear plan B and a readiness to pivot quickly.”
In her analysis, Gill also highlighted that Japanese 30-year bond yields hit record levels earlier this month, climbing over 100 basis points this year. She attributed this to a Japanese government fiscal spending package, as well as the Bank of Japan (BoJ) signalling a potential rate hike this week.
Along with Australia and Canada also shifting their tone on rates – leaving the US increasingly out of step with much of the world – Gill said BlackRock sees this divergence as a key risk heading into next year.
“We already see the Fed erring on the side of being too easy even with the divisions among Fed policymakers.
“Long-term Treasury yields can rise further if investors demand more premium for the risk of holding them, so we prefer short-term Treasuries in this environment,” she said.
Finally, given that stronger hiring or business confidence could revive inflation and debt sustainability concerns, Gill concluded that this week’s US payroll data will be closely watched. After losing 105,000 jobs in October, the US added 64,000 nonfarm payroll positions in November, according to figures released by the Bureau of Labor Statistics on Tuesday.
