BlackRock adds to short-term U.S. Treasuries, downgrades U.S. equities: "Rate hike bets have gone too far," should lock in high yields.

Note that BlackRock's research arm has turned more bullish on U.S. Treasuries, abandoning the underweight stance that had been its "base case" for most of the past six years, as yields have climbed to their highest levels in more than two decades. The BlackRock Investment Institute upgraded short-term U.S. Treasuries to "overweight" and raised long-term U.S. Treasuries to "neutral," citing rising yields and the possibility that the market's expectations for Federal Reserve tightening may be "overdone." According to a report written by strategists Jean Boivin, Wei Li and BlackRock's global chief investment officer of fixed income Rick Rieder, the firm also trimmed its underweight position in Japanese government bonds. To fund this shift, the firm downgraded U.S. equities from a long-held "overweight" to "neutral," citing "potential volatility in the AI buildout." It also downgraded U.S. agency mortgage-backed securities (MBS) to "neutral." U.S. bond losses mount this month The move marks a notable turn for BlackRock. The firm first "underweighted" U.S. Treasuries in October 2020, when the 10-year yield was near 0.9%. Since then, the benchmark yield has surged above 5.2% as investors grappled with stronger economic growth, robust capital demand, and inflation concerns rekindled by rising oil prices and Middle East tensions. "Now that yields have come back toward our long-held view of higher rates, we want to lock in some attractive income," the team wrote. BlackRock is the latest large asset manager to turn more favorable on fixed income after the sharp rise in yields. Rupert Harrison, a senior portfolio adviser at PIMCO, said last week that the firm's overall bond portfolio had "more duration than we've had in a long time." BlackRock said the market's current expectations for Fed rate hikes have gone too far, and that short-term U.S. Treasuries would be particularly attractive if those bets are scaled back. Interest-rate swaps show traders expect at least three quarter-point hikes over the next 12 months. BlackRock said that at current levels, bond yields could rise another 75 basis points over the next 12 months before the income earned on Treasuries would be fully offset and total returns would turn negative. The team stressed that the exit from U.S. equities was more about managing short-term risk than changing its long-term outlook. The firm's confidence in the AI investment boom remains unchanged, and it continues to favor AI-related companies and listed infrastructure assets. However, rising rates are increasingly separating companies based on whether they can generate returns above their cost of capital. "We are managing near-term risk, not changing our core beliefs," the team wrote. "We stay constructive on AI and are ready to add risk again when visibility improves and attractive entry points emerge."