BlackRock’s Boivin Says Global Bonds Are Favored Over U.S. Treasuries

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(Bloomberg) — Investors should favor global bonds over long-dated U.S. Treasuries, with persistent inflation forcing the Federal Reserve to step aside next year, according to Jean Boivin, head of the BlackRock Investment Institute.

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“We see inflation not getting out of control, but not cooperating in a way that allows rates to be lowered,” he told Bloomberg in an interview at BlackRock’s New York offices on Wednesday. “This is not the beginning of a cycle of easing. It will be an adjustment, a re-adjustment. “

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Since the US central bank began cutting rates in mid-September, two-, five- and 10-year yields have risen from around 3.5% to more than 4%. The selloff coincided with traders discounting the possibility of a major cut amid strong economic data, with a cut of more than three percentage points over the next 12 months to around 3.7%.

Boivin sees “the Fed doesn’t have much room to cut below 4%.”

Several Fed officials indicated this week that they are taking a measured approach to lowering rates next year to a neutral range of around 3%, as President-elect Donald Trump proposes tax cuts, tax cuts and tax cuts that could spur better growth again. inflation in his second term.

BlackRock’s research arm, which released its global outlook for 2025 on Wednesday, has a long-term underweight on Treasuries that is “close to strategic” and Boivin said BII prefers to hold US corporate debt, UK gilts and other bonds in non-US jurisdictions. they have more room for central banks to ease in 2025.

The 10-year US Treasury yield has been surprisingly sensitive, pointing out that the market is “reassessing long-term trends on the basis of short-term data,” and that is helping to “reinforce volatility.”

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After testing a post-election high of 4.5% last month, the 10-year yield found buyers and is trading this week around 4.2%, when the market rallied on Wednesday after a softer-than-expected reading on services sector activity.

Boivin reiterated concerns about the rapid growth of US debt and the continuing deficit and warned that the cost of servicing that pile will be a problem for the markets, as Scott Bessent, the designated Treasury secretary, has spoken about reducing the budget deficit to 3% of GDP. in the next few years.

“The issue of shortage is on the sidelines and there is no need to cut back,” he said.

Boivin said he sees risks “from any rise in long-term bond yields.” He does not rule out a 10-year yield that is “very close to 5% or is expected to stay there for a long time,” an outcome that could change the “budget balance,” in the US and encourage investors to seek more yield in their holdings. Treasury bonds.

“There was also hope that we are returning to a low-level situation, so questions about debt service costs may cause long-term payment adjustments,” he said.

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Some points to consider for investors in the next year include:

• Bitcoin is emerging as a diversification amid the “absurd” correlation between stocks and bonds, the BII said, including the asset class in its opinion for the first time. Under the presidency of Trump, a pro-crypto leader, the research arm expects different drivers of Bitcoin’s comeback – including its limited supply amid growing demand – to make it unrelated to the traditional risky asset. BlackRock this year launched its first Bitcoin ETF, which has raised nearly $50 billion. It is one of the most successful ETF launches in history.
• The BII says the “enormous potential” of artificial intelligence, deepening globalization, aging populations and the transition to green energy suggests that long-term trends are changing and leading to many different outcomes. That is different from the pre-pandemic period when there was a main trend of growth and inflation.
• The lack of a stable long-term trend “and an evolving outlook” requires “more weight in the strategic view.”
• Investors should rethink their portfolios from the traditional 60/40 strategy and include private debt and infrastructure.
• Private market assets are expected to double by the end of the decade to nearly $25 trillion.
• AI and rising wage growth appear to be benefiting US stocks. The BII is overweight the US relative to global peers such as European stocks. Japan excels in business innovation and the ability to drive prices for profit.

—Courtesy of Isabelle Lee.

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