Why a sudden spike in 10-year Treasury yields to round 1.5% shouldn’t spook buyers, says BlackRock

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Government bond yields suddenly fell from relatively low levels because the government bond market was “overdue for a correction,” says Jean Boivin’s team at the BlackRock Investment Institute, pointing to the rapid resumption of the US economy after the pandemic shutdown.

Bond prices fall when yields rise.

The 1.482% rise in 10-year Treasury yield TMUBMUSD10Y last week to over 1.5% for the first time since June helped put ailing US stocks under pressure.

Despite the shocks, BlackRock’s strategy team viewed the sharp rise in the 10-year rate as a market response to the economic recovery from COVID-19 rather than a response to a more “hawkish swing” by central bankers.

“We had argued since the spring that, given the widening restart, yields were too low and this would ultimately be corrected,” wrote Boivin et al. in a Monday note.

“Back then, it took weeks for yields to rise about 20 basis points to 1.50%, and this time it only took a week – which underscores our view that markets may catch up with the reality of the restart.”

Investors are demanding more money for 10-year government bonds

BlackRock Investment Institute

The attached chart shows how last week’s 10-year rise in yields was in large part driven by increased investor demand for “term premiums” or compensation for holding longer-term government bonds, rather than a noticeable change in inflation expectations.

The graph also highlights how the ten-year government bond maturity premium has been compressed over much of the past decade.

“We see this as a more favorable adjustment and see the persistently negative real returns and the expanding restart as support for risk assets,” wrote Boivin’s team, adding that even if there might be more volatility spurts in the future, “higher term premiums in this environment” doesn’t have to be bad news for stocks. ”

Risk assets were sold on Monday as the battle intensified in Washington, DC over the US debt ceiling and a proposed $ 3.5 trillion infrastructure spending package. In a speech at the White House, President Joe Biden warned that “a meteor will hit our economy” unless lawmakers increase the federal credit limit.

Read: The US could be heading for an “era” of high inflation that will generate poor or even negative real returns on safe assets, warns analysts

The information technology sector SP500.45 of the S&P 500, -2.36% and the communications sector SP500.50, -2.11% both lost more than 2% in afternoon activity, while the Dow Jones Industrials Average DJIA, -0, 94% yielded by about 1%. and the Nasdaq Composite Index COMP, -2.14% were 2.4% lower. The 10-year government bond yield was close to 1.488% when it was last reviewed.

BlackRock’s recommendation is “broadly underweight” government bonds, particularly longer maturities, and overall “pro-risk” over the next six to twelve months, even with “narrowing the upside for risk assets,” with a peak in US growth momentum in the rearview mirror.

“You can only turn the light back on once, so to speak,” wrote the team.

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