BlackRock turns overweight on Treasuries as yields soar

After weeks of selling pushed US Treasury yields to their highest levels since 2002, some of Wall Street's biggest firms say government bonds now look like good value. They still disagree about where Federal Reserve policy is headed and when a rally might arrive. Goldman Sachs The Goldman Sachs Group, Inc. ↘ 0.15%, Morgan Stanley ↗ 0.00% and Citi Citigroup Inc. ↗ 1.76% are among those arguing that the sell-off has made bond valuations attractive. BlackRock ↗ 0.14% went further and upgraded US Treasuries to overweight. That ends an underweight stance that had shaped its strategy for most of the past six years.news.futunn+1

The benchmark 10-year yield rose above 5.36% on Wednesday, its highest in 24 years. It fell back to around 5.23% on Thursday after strong demand at a $22 billion auction of 30-year bonds.scmp

BlackRock shifts toward the short end

The BlackRock Investment Institute, led by strategists Jean Boivin, Wei Li and Rick Rieder, now favors short-term government debt and has raised long-term Treasuries to neutral. To pay for the move, the firm cut its US equity overweight to neutral and reduced its holdings of agency mortgage-backed securities. BlackRock first went underweight when 10-year yields were near 0.9% in October 2020. Those yields have climbed about 110 basis points this year. The firm attributes most of the rise to higher real rates, not to inflation expectations. It considers the market's pricing of an extra 160 basis points of Fed tightening since January to be excessive. By its estimate, investors have a 75-basis-point cushion against further rate rises over the next 12 months before total returns turn negative.investing

Different paths to a rally

A Goldman team led by William Marshall said long-term forward rates are well above fair value. It added that technical pressures which made the sell-off worse are easing, pointing to mortgage convexity risk that has fallen close to zero. Citi prefers two- to three-year notes. It expects the Fed to hold rates steady this month and forecasts a 0.18% monthly rise in core CPI. Morgan Stanley's Matthew Hornbach said 10-year yields could fall to between 3.5% and 4.5% if nominal growth stays at 4% to 5%. Even so, the firm advises waiting until after the Fed meeting and the midterm elections before buying. Standard Chartered recommends an opportunistic long position in 10-year notes and expects the yield to ease toward 4.75% to 5% within six to 12 months.news.futunn+1

Skeptics stay cautious

Not everyone agrees. Barclays ↗ 0.48% strategist Anshul Pradhan cautioned that higher yields do not protect investors from further increases. He estimated the implied term premium at about 1.3 to 1.5 percentage points. Bank of America ↗ 0.48% thinks markets are underpricing the chance of an October rate hike. Swaps imply a probability of only about 19%. UBS ↘ 0.64% remains neutral on duration, citing robust growth and energy prices.news.futunn

The US bond market was closed Monday for a holiday. Consumer and producer price data for September, due this week, are expected to set the next move in yields.investing+1