QUESTION OF THE WEEK

Where are real yields headed in six months?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and our insights.  

    Real yields, or inflation-adjusted yields, of government bonds have plunged to sub-zero levels in both the U.S. and Europe – supporting the case for equities and other risk assets.

    Where do you see real rates going in the next 6 months?

      Poll results: Where are real yields headed in six months?

       Poll results

      More than 5 in 10 responses (53%) to our public poll see real yields, or inflation-adjusted yields, moving gradually or significantly higher, 41% voted they’ll remain stable and 6% see yields dipping lower.

      By contrast, the overwhelming majority of BlackRock portfolio managers (92%) see real yields moving higher, and the consensus is that the move will happen gradually.

       A disconnect

      Everyone can see there is a disconnect between fundamentals and rates, noted a BlackRock portfolio manager from the Systematic fixed income team. What's less clear, he said, is what will be the catalyst to move them back up.  They could stay negative if COVID-19 variants threaten the economic outlook, he said, adding they are unlikely to go deeper into negative territory as a lot of bad news is already priced in. 

       The Fundamental fixed income team expected a measured rise in yields as the Fed may be deliberately slow to act to avoid triggering volatility in other asset classes. Others believed the Fed’s starting to taper asset purchases would be enough to get 10-year yields up. 

      Global divergence

      Some BlackRock portfolio managers pointed out risks to the consensus view, including a possible desire to keep rates low to sustain mounting debt loads and the potential for Delta or other virus variants taking hold. Playing devil’s advocate, a portfolio manager in the Multi-Asset Strategies and Solutions team argued the case for stable rates: the pandemic is far from over, travel is still down, growth has peaked and optimism around a new growth cycle has faded. 10-year Treasuries went down to 1.15% without any major concerns about the short-term outlook, so who knows how low they can go if we get recessionary fears?

      There were some expectations for a global divergence in yields, with U.S. real rates heading gradually higher on the back of strong economic data and little risk of new lockdowns. Real yields in Europe will likely remain stable or move slightly lower, portfolio managers said. The reason: European Central bank’s updated forward guidance makes clear there are no rate hikes on the horizon, and a possible increase in COVID-19 infections moving into the autumn could add to downward pressure on nominal yields. 

      Structurally higher inflation

      The BlackRock Investment Institute expects structurally higher inflation – hovering around 3% – over the medium term, driven by higher production costs and central banks letting inflation run a little hot to make up for it undershooting their targets in the past.

       

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