Weekly market commentary

Yields on benchmark 10-year US Treasuries last week briefly rose to 16-year highs above 4.50% as major central banks paused rate hikes but left the door open for more. Markets are coming around to our view that rates will stay high – and now even exceed our expectations in Europe. Rising long-term bond yields show markets are adjusting to risks in the new regime of greater macro and market volatility. We get granular in bonds and equities.

Going up

US Treasury yields and policy rate, 1985-2023

All eyes initially were on monetary policy last week amid a blitz of central bank decisions. Then the main story quickly became surging 10-year bond yields to 16-year highs (dark orange line in chart) – even as the Fed and other central banks left policy rates unchanged (yellow line). We think the market is adjusting to the new regime and its implications – especially higher macro volatility. This is bringing to light just how uncertain the outlook is as well as the risks to longer-term bonds. As markets adjust to the new regime, we see opportunities. We’ve turned positive on long-term UK gilts and European government bonds, where that adjustment is more advanced. But we’re not yet ready to jump back into long-term US Treasuries. We think term premium – the compensation investors seek to hold long-term bonds – can return and push yields higher still, as can quantitative tightening and the step-up in Treasury issuance.

Rate hikes are weighing on economies. Major central banks are administering the medicine of tighter monetary policy and economies have slowed. The medicine is still working its way through the system – and effects have varied across regions. PMI data across Europe has shown stagnation. GDP data suggest activity has held up in the US But we think activity has actually stagnated there as well. That seems to have gone under the radar: a stealth stagnation. The average of GDP and another official measure of activity, gross domestic income, shows the US economy has flatlined since the end of 2021.

Central bank blitz

The market narrative hasn’t been one of US stagnation though. One reason: We’ve avoided the short and sharp drop of recession for now. Instead, it’s felt like a rolling effect of hikes rippling through the economy – that may be why the market feels different, too. The weakness we’re seeing isn’t a normal business cycle slowdown, in our view. Unemployment is still low. That suggests something structural is at play, so we don’t think a purely cyclical lens applies. We’ve long said we’re in a world shaped by supply – and this is playing out. We see constraints on supply building over time – especially from a shrinking workforce in the US as the population ages. Central banks need to keep a lid on growth to avoid resurgent inflation once pandemic-era mismatches unwind. That’s why we see them holding tight, not cutting rates like they did in past slowdowns.

Our long-held underweight to long-term US Treasuries has served us well as yields climb. Markets have come around to our view on policy rates. Yet there is still little term premium. We prefer short-term Treasuries given comparable income to high-quality credit without the same credit or interest-rate risk. We also like long-term bonds in Europe and the UK. Ten-year yields there are around three percentage points higher than the pre-pandemic average, versus about two in the US

Japan stands apart. First, the Bank of Japan is seeking to ensure it has got inflation up sustainably to 2%. Keeping policy unchanged last week suggests it would rather hike too late than risk being too early. Japanese bond yields have been relatively stable, but we expect a jump as suggested in market pricing with the BOJ loosening its yield cap over time. Second, Japan is not suffering the same structural downshift in growth – and corporate reforms are taking shape. We think strong growth can boost earnings and shareholder-friendly actions may keep attracting foreign investors to Japanese equities.

Our bottom line

Bond yields are surging as the market adjusts to the implications of the new macro regime. We tactically prefer short-term bonds in the US for income, long-term bonds in Europe and the UK – and Japanese stocks.

Market backdrop

The 10-year US Treasury yield jumped to 16-year highs and US stocks slumped over 2% last week – with the S&P 500 steadying some on Friday after its worst day since the March banking tumult. The Fed, the Bank of England and BOJ all kept rates unchanged. We think surging bond yields show markets reassessing the greater uncertainty and volatility in the new macro regime. We expect persistent inflationary pressures to play into this as demographic changes start to bite.

US and euro area inflation is in focus this week, including the Fed’s preferred PCE gauge. Inflation has cooled as the spending shift back to services helps resolve some the pandemic-era mismatches in supply. But we expect core inflation to stay on a rollercoaster as aging populations keep the labor market tight and keep up inflationary pressures.

Read our past weekly commentaries here.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, September 2023. 

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2023.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2023. 

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.