MARKET INSIGHTS
Weekly market commentary
Jul 21, 2025 | Blackrock Investment Institute
A new regime for income in portfolios
Market take
Weekly video_20250721
Michel Dilmanian
Portfolio Strategist, BlackRock Investment Institute
Opening frame: What’s driving markets? Market take
Camera frame
Higher-for-longer policy interest rates make this the best backdrop for earning income in bonds in two decades. We favor a mix of income sources.
Title slide: A new regime for income in portfolios
1: Income is back
Now that interest rates have settled above pre-pandemic levels, some 80% of global bonds offer yields above 4%. That’s made short- and medium-term bonds more attractive.
Another source of income: converting returns for foreign bonds into U.S. dollars.
2: Credit for quality
Credit is attractive even with historically tight spreads. Spreads have been largely steady this year even with the equity volatility. And balance sheets have held up with resilient growth.
3: Staying selective
We stay selective as we see risks that could push up on long-term yields, especially fiscal sustainability.
We upgraded emerging market debt in local currencies to neutral, as it withstood U.S. trade policy shifts. And we went overweight U.S. agency mortgage-backed securities, as we see wider spreads and steepening yield curves drawing back buyers.
Outro: Here’s our Market take
We like a mix of income opportunities but stay selective due to fiscal sustainability risks. We like short- and medium-term bonds and Europe over the U.S.
Closing frame: Read details: blackrock.com/weekly-commentary
Fixed income opportunities
Higher-for-longer interest rates offer solid income sources. We favor short- and medium-term government bonds, mortgage-backed securities and select credit.
Market backdrop
U.S. stocks hit fresh record highs last week, helped by strong economic data. U.S. corporate earnings season kicked off with big tech companies reporting.
Week ahead
This week, we watch the European Central Bank policy decision. We expect it will hold rates steady but monitor for signs of potential easing later in the year.
Higher-for-longer policy rates have made this the best backdrop for earning income in bonds in two decades – without taking more interest rate or credit risk. We favor a mix of income sources. We like short-term government bonds: the U.S. budget bill passed last month highlighted a lack of fiscal discipline, while sticky inflation limits rate cuts, keeping us tactically cautious on long-term bonds. In credit, resilient growth has kept corporate balance sheets solid even with tariffs.
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Income is back
Fixed income assets with yields of 4% of larger, 2000-2025
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Indexes are unmanaged and performance does not account for fees. Source: BlackRock Investment Institute, with data from LSEG Datastream, July 2025. Notes: The bars shows the market share of assets with an average annual yield over 4% in a select universe that represents about 70% of the Bloomberg Multiverse Bond Index. Euro Government Debt is based on government bond indices for Germany, France, Italy, Spain and Ireland. Emerging markets combine external and local currency debt. Data for 2025 is not averaged and reflects month-end yield for June.
After the global financial crisis (GFC), bond yields slid as central banks slashed policy rates to near zero or below and bought bonds. That left investors starved of income unless they took risk in long-term bonds. In a stark switch-up, some 80% of global fixed income assets now offer yields above 4% as interest rates have settled above pre-pandemic levels. See the chart. That’s made assets like credit, mortgage- backed securities and emerging market debt more attractive. We have seen notable bond market developments this year. Credit spreads have been relatively steady even with sharp equity volatility. And investors are demanding more compensation for the risk of holding long-term bonds, leading to a steepening of global yield curves. The curve between five and 30-year U.S. Treasury yields has more than doubled this year to its steepest levels since 2021, according to LSEG data.
We see abundant opportunities to earn income. We prefer short- and medium-term government bonds given yields near 4%. Markets are pricing in multiple Federal Reserve rate cuts over the next year. Yet we see sticky inflation limiting rate cuts – even as renewed rate hikes are unlikely. Our preference is partly driven by our caution on long-term bonds due to the lack of U.S. fiscal discipline and sticky inflation – though we could see occasional sharp rallies. The U.S. is issuing nearly $500 billion of debt weekly to fund its persistent budget deficits, per Haver Analytics. And the Congressional Budget Office expects the One Big Beautiful Bill to only add to deficits in the near term. Trade tensions could cool foreign demand at a time when sustaining U.S. debt relies on their ongoing buying – as we noted in our 2025 Midyear Outlook. We’re watching the market’s ability to absorb heavy Treasury issuance. Fiscal sustainability is not just a U.S. story: In Japan, 30-year yields hit a record high last week as policymakers floated tax cuts before Sunday’s upper house election.
Where we find income
Higher U.S. policy rates mean interest rate differentials between the U.S. and other countries stay wide, revealing an array of global fixed income opportunities. That’s because hedging foreign bonds back into U.S. dollars boosts the income they offer. Some euro area bonds, like Spain, offer yields above 5% with such hedging – higher than U.S. equivalents. Credit has become a clear choice for quality. Spreads are historically tight, yet credit income remains attractive as balance sheets have held up alongside growth, even with tariff uncertainty. Default rates for U.S. high yield credit remain about half the 25-year average, according to J.P. Morgan data. We prefer European fixed income over the U.S. given a more stable fiscal outlook, especially European bank debt given strong financial earnings and insulation from tariff impacts.
We get selective across and within regions. We went overweight U.S. agency mortgage-backed securities (MBS): spreads are wider than historical averages and we could see some investors switch from long-term Treasuries. We upped local currency emerging market (EM) debt to neutral this month: it has weathered U.S. trade policy shifts, and debt levels have improved.
Our bottom line
We like a mix of income opportunities but stay selective due to fiscal sustainability risks. We favor short- and medium-term government bonds, U.S. agency MBS, currency hedged international bonds and local currency EM debt.
Market backdrop
The S&P 500 hit new record highs last week, helped by signs of U.S. economic resilience in strong U.S. retail sales data. U.S. corporate earnings season kicked off with some big tech companies, putting renewed focus on artificial intelligence and capital spending. The index quickly recovered from reports that U.S. President Donald Trump discussed removing Fed Chair Jerome Powell, which Trump denied. Thirty-year Treasury yields ended the week steady at 4.99%, near May’s two-year high.
This week, we’re watching the European Central Bank’s (ECB) policy decision. We expect it to hold rates steady until September. The central bank now sees policy rates within a neutral range that neither stimulates nor restricts economic activity, inflation remains around its 2% target, and euro area growth shows little change. We watch for signals on whether the ECB will stay cautious or begin laying the groundwork for easing later this year.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of July 17, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.
July 23
Euro area consumer confidence
July 24
European Central Bank policy decision; global flash PMIs
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Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Rick Rieder
Head of Fundamental Fixed Income – BlackRock
Michel Dilmanian
Portfolio Strategist – BlackRock Investment Institute
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.