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2020 Global Outlook: Testing limits

Rethinking resilience

Yields are testing lower limits in many developed markets, making many government bonds less effective portfolio ballast in case of equity market selloffs. A focus on sustainability can help add resilience to portfolios as markets wake up to environmental, social and governance (ESG) risks.

Implication: We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast and like inflation-protected securities against inflation risks.

Pricier labor
Changes and components in U.S. GDP Deflator, 2000-2020

Changes and components in U.S. GDP Deflator, 2000-2020
  • Source

    BlackRock Investment Institute, with data from the U.S. Bureau of Economic Analysis and Refinitiv, November 2019. Notes: The GDP deflator is a gauge of inflation that measures the year-on-year exchange in prices of all goods and services produced in an economy. We decompose the deflator into three key drivers involved in creating each U.S. dollar of real gross domestic product (GDP), including labor costs, profit margins and capital expenses. The dotted green line is a BlackRock estimate. Forward-looking estimates may not come to pass.

  • U.S. Treasuries maintain their ballast properties against equity market selloffs, in our view, but it is time to rethink the role of government bonds outside the U.S. Monetary policy may be reaching its limit in stoking growth – and rates in some developed markets are nearing the lowest levels that central banks can feasibly set. The pool of sovereign bonds with negative yields expanded to some $17 trillion in 2019, according to Bloomberg data.
  • As bond yields fall closer to lower limits, the risk/return profile for bonds becomes increasingly asymmetric. In other words, bond prices have more room to fall than rise in response to shocks.
  • A focus on sustainability can also help make portfolios more resilient, in our view, by reducing exposure to environmental, social, and governance (ESG) risks.
  • Inflation, by contrast, could surprise to the upside, particularly in the U.S. Reasons include increases in capacity utilization and tight labor markets. Wages are on the rise, as the Pricier labor chart shows. Over time, supply shocks could add to price pressures. We see a case for substituting some nominal government bond exposures for U.S. Treasury Inflation-Protected Securities (TIPS) as a source of resilience against inflation surprises.

Bottom line: Low government bond yields and underappreciated inflation risks require a rethink of the role of government bonds as portfolio ballast, especially outside the U.S.

Meet the authors
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee. He is also Chairman of the Financial Markets Advisory (FMA
Jean Boivin, PhD
Managing Director, Global Head of Research for the Blackrock Investment Institute
Jean Boivin, PhD, Managing Director, is Global Head of Research for the Blackrock Investment Institute and is a member of the EMEA Executive Committee. His team is ...
Elga Bartsch
Managing Director, Head of Macro Research of the BlackRock Investment Institute
Elga Bartsch, Managing Director, is Head of Macro Research of the BlackRock Investment Institute. Elga heads up economic and markets research of the Blackrock Investment ...
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Scott Thiel
Chief Fixed Income Strategist
Scott Thiel, Managing Director, is Chief Fixed Income Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). He is responsible for developing ...