Will government bonds provide ballast?

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 insights.

The Democrats’ newly gained slim majority in U.S. Congress paves the way for greater public spending and has sweeping implications on the macro and market outlook, including for government bonds. Where do you think U.S. ten-year Treasury bond yields end in December 2021? 

48% of respondents to our public poll saw the U.S. 10-year yield ending the year higher, while just under one third expect bond yields to be little changed from a recent high of 1.19%.

A similar share of BlackRock portfolio managers saw Treasury yields higher at the end of 2021, with 28% seeing them much higher (above 1.5%).

What higher rates mean

One senior economist saw core inflation in the U.S. staying subdued through the first half of 2021, but rising into year-end and 2022 based on the rollout of Covid vaccines and the resumption of economic activity. What would higher rates mean for markets? BlackRock’s Multi-Asset Strategies group believes that asset prices already reflect expectations of higher U.S. rates to  some extent. The important thing is gauging the range of possible outcomes. Another portfolio manager commented that the focus on potential higher Treasury yields has spurred demand in Europe for floating-rate products such as U.S. loans over high yield – a reversal of last year's trend. 

Eyes on EM

Some investors viewed a stronger U.S. dollar and higher U.S. yields threatening the EM rebound. Others did not see  a repeat of a 2015 or 2018-style selloff in EM sovereign bonds, even after the asset class is off to its worst start to a year in two decades. For example, one EM portfolio manager noted the surprise in performance of Indian equities – up 100% from the lows of last March.

The BlackRock Investment Institute sees sweeping policy changes in the first two years of the Biden administration leading up to the 2022 midterm elections. Hefty fiscal stimulus may be on the way, including a $1.9 trillion package proposed last Thursday. The ultimate size of these fiscal packages, in our view, will be determined by moderates on both sides of the political aisle.

The Democrats’ newly held majority in U.S. Congress as a result from the Georgia runoff elections has helped fuel a climb in U.S. inflation expectations. This outcome accelerates our new nominal investment theme, pushing inflation expectations higher over time while the Federal Reserve keeps the rise in nominal yields in check.

To learn more about our key investment themes read our 2021 global outlook.   

Tune in next Thursday for our new question of the week!