BlackRock interprets bond market panic: The main reason for the skyrocketing yield is not a financial crisis, but the reconstruction of neutral interest rate expectations.

BlackRock said that the rising yields in global government bond markets reflect expectations of maintaining high interest rates, rather than concerns about an impending financial crisis. From the US, UK to France and Japan, long-term sovereign bond yields have surged this year, pushing yield curves to their steepest levels in years. While this repricing is often blamed on heavy government borrowing and budget deficits, BlackRock's global head of investments and portfolio solutions, Alex Brazier, has a different view. Brazier said in an interview, "I believe these global market fluctuations do not reflect concerns about fiscal conditions, but rather market expectations for neutral interest rate levels and the premium needed to persuade investors to buy long-term bonds instead of short-term bonds." The spread between 5-year and 30-year bond yields in major markets is widening Neutral interest rate refers to the monetary policy level that neither stimulates nor restricts economic growth. BlackRock believes the current neutral interest rate is higher than historical levels, partly due to loose fiscal policy, and also driven by high investment spending (especially in the field of artificial intelligence). Brazier pointed out, "All these factors are pushing up the level of interest rates required to maintain smooth economic operation." After years of ultra-low yields in the era of loose monetary policy, the bond market is still seeking a new balance point. For example, the yield on 30-year German government bonds, which was below zero four years ago, has now risen to 3.25%. The yield on similar bonds in the UK recently reached the highest level since the late 1990s. Despite some volatile periods (such as the reaction to former UK Prime Minister Theresa's 2022 "mini-budget"), the overall adjustment in yields remains orderly. In addition, new bond issuances still receive orders in the tens of billions of dollars, highlighting strong investor demand. Even France (where the Prime Minister resigned earlier this week for failing to win support for budget cuts) has not fallen into debt issuance difficulties. Years of loose public spending have left the country with the largest deficit in the Eurozone, with debt growing at a rate of 5,000 euros (5,840 dollars) per second. Although a vote of confidence is imminent in parliament, France's bond auction last week still saw strong demand, with the yield spread on its 10-year government bonds relative to German government bonds dropping from a recent high of 83 basis points (the highest since January) to 78 basis points. Brazier said that these market trends indicate that investors expect that France "will eventually solve its budget situation." While long-term bonds from France and the UK have recently attracted market attention, similar repricings have taken place across major government bond markets. Based on the historical trend of steepening global yield curves, pressure on long-term bonds may persist. Simon Brendel, Co-Head of Fundamental Fixed Income for Europe, the Middle East, and Africa at the company, admitted, "We are really not willing to allocate resources to long-term bonds, including the UK."