BlackRock’s latest weekly market commentary has highlighted a significant transformation in the investment landscape: a regime of higher-for-longer interest rates not seen in decades.
Following the global financial crisis, central banks drastically cut policy rates and engaged in bond purchases, leading to a decline in bond yields and forcing investors to take on greater risk in long-term bonds.
Now, in what the world’s largest wealth manager is calling a “stark switch-up”, some 80 per cent of global fixed income assets offer yields above 4 per cent as interest rates settle above pre-pandemic levels.
The shift has made assets like credit, mortgage-backed securities and emerging market (EM) debt more attractive, according to the firm.
“We like a mix of income opportunities but stay selective due to fiscal sustainability risks. We favor short- and medium-term government bonds, US agency MBS, currency hedged international bonds and local currency EM debt.”
A key development has been the increasing demand for higher compensation by investors holding long-term bonds, which the wealth manager said has led to a steepening of global yield curves.
Looking at LSEG data on the US, the firm found the curve between 5- and 30-year US Treasury yields has more than doubled over the course of the year, implying that investors are increasingly pricing in future inflation or stronger economic growth.
The firm also noted new record highs achieved by the S&P 500 in the last week, helped by signs of US economic resilience in strong US retail sales data. As well as this, the US corporate earnings season kicked off with some big tech companies leading the reports – again putting focus on artificial intelligence and capital spending.
BlackRock observed the index’s swift recovery despite a volatile week, marked by reports – later denied by US President Donald Trump – of discussions regarding Fed chair Jerome Powell’s removal.
Thirty-year Treasury yields concluded the week stable at 4.99 per cent, close to May’s two-year peak.
Looking forward, BlackRock said all eyes will be on the European Central Bank’s policy decision this week.
“We expect it will hold rates steady but monitor for signs of potential easing later in the year.”
