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A quiet August? Not for investors
Market take
Weekly video_20260803
Michel Dilmanian
Portfolio Strategist
BlackRock Investment Institute
Header:
CAPITAL AT RISK. MARKETING MATERIAL.
Opening frame: What’s driving markets? Market take
Camera frame
Title slide: A quiet August? Not for investors
August is usually a quiet month for markets. Yet this year is looking different. Key factors like volatile oil prices amid the Middle East conflict and ongoing repricing in government bond yields underscore our long-held view of a world shaped by supply.
1: Higher for longer
Recent moves in bond markets fit that picture.
After last week's FOMC meeting, investors demanded more compensation to hold long-term government bonds. At the same time, AI investment and persistent government borrowing are increasing competition for capital, while Middle East tensions continue to threaten energy supplies.
We see that broader repricing as another sign that scarcity is shaping today's investment backdrop.
2: Unpacking the repricing
We don't see this as a short-term shift.
The cost of long-term capital has been rising for years, and the AI buildout is adding to that trend. Companies are investing at an unprecedented pace, increasing demand for capital.
AI may boost productivity over time, but today the buildout is helping push yields higher.
3: Investment takeaways
Higher borrowing costs are changing the role of fixed income.
Long-term government bonds may no longer provide the same diversification benefits. Instead, we see stronger opportunities to build durable income through short- and medium-term government bonds and selected credit.
Outro: Here’s our Market take
Durable income is one of the clearest opportunities created by today’s higher cost of capital environment. We favor building durable income through short- and medium-term Treasuries, local-currency emerging market debt and short maturity euro area bonds, to name a few.
Closing frame: Read details: blackrock.com/weekly-commentary
Structurally higher rates
AI, oil and government bond yields are all sending the same message: scarcity is shaping markets and keeping borrowing costs higher.
Market backdrop
The sell-off in long-dated US Treasuries pushed the 30-year yield to a 19-year high of 5.28% as markets reassessed the Fed’s reaction function.
Week ahead
US nonfarm payrolls take the spotlight this week, offering clues on whether labor market conditions are consistent with our high-for-longer rate view.
Investors hoping August will bring a summer lull may be disappointed. Oil prices are swinging with every twist in the Middle East conflict, while AI earnings and spending plans are driving sharp moves in stocks. Alongside the repricing in government bond yields, these developments underscore our long-held view of a world shaped by supply scarcity keeping inflation and borrowing costs higher. For investors, the role of government bonds has shifted: less ballast, more income.
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The real deal
10-year real government bond yields across major developed markets, 2010–2026
Source: BlackRock Investment Institute, with data from LSEG Datastream, July 2026. Notes: Chart shows 10-year inflation-adjusted government bond yields for the US, U.K., Germany and Japan.
The steepening of the two-year/30-year Treasury yield curve after last week’s Federal Reserve meeting reflects growing inflation worries and uncertainty over how the Fed will respond. We see this not as new but as a continuation of the broader macro regime we have described for several years. The fastest AI investment buildout in history is unfolding in a world shaped by supply scarcity, where energy constraints, tight labor markets and geopolitical fragmentation are shifting the focus from efficiency to resilience. Meanwhile, governments and hyperscalers are drawing on the same pool of savings, intensifying competition for capital. These forces are pushing investors to demand higher returns to lend for longer, lifting real yields across developed markets. See the chart. That broader repricing underpins today’s investment backdrop.
The global repricing of long-term bond yields has come a long way. The US 10-year Treasury yield has risen from less than 1% six years ago to nearly 5% today. German 10-year yields recently reached a 15-year high and Japanese 10-year yields have approached 3% for the first time since the mid-1990s.
An accelerating repricing
The structural forces behind higher bond yields have been building for several years but intensified this year. What was already the fastest AI investment boom in history has accelerated further, with consensus forecasts for hyperscaler capital spending in 2026 revised about 30% higher over the past six months to $720 billion. Greater sovereign borrowing and persistent fiscal deficits, alongside a shift in Middle Eastern investment toward domestic priorities, have reduced capital available for overseas investment and further intensified competition for capital. Scarcity-driven inflation—amplified by the Middle East energy and commodity shock—has driven a sharp repricing of Fed expectations from easing to tightening, prompting a global rise in bond yields. More recently, new uncertainty around the Fed’s reaction function under new Chair Kevin Warsh has pushed the term premium higher.
Higher yields have changed both the role of government bonds in portfolios and the opportunity set for investors. Bonds have become a less effective portfolio ballast. The correlation between daily US equity and 10-year Treasury returns averaged 7% over the last five years, compared to -43% in the decade prior to the pandemic. Still, higher yields have created attractive income opportunities, reinforcing our durable income theme. More than 80% of the global bond universe now yields above 4%, versus around 20% in the decade pre-pandemic. Rather than reaching further out the curve, we favor building durable income through short- and medium-term Treasuries, local-currency emerging market debt, short-maturity euro area bonds, agency mortgage-backed securities and selected public and private credit with resilient cash flows. Higher borrowing costs also raise the bar for equities. But companies able to grow earnings faster than borrowing costs increase can still outperform. However, we expect greater dispersion across companies, strengthening the case for active investing.
Our bottom line
AI investment, prolonged supply shocks and heavy government borrowing are accelerating the repricing of long-term rates. Government bonds provide less ballast but more income, expanding the opportunity for durable income.
Market backdrop
Bond markets were in focus last week. Investors sold long-dated Treasuries after the Federal Reserve held rates steady, pushing the 30-year yield to a 19-year high of 5.28% as markets reassessed the Fed’s reaction function. At the same time, the two-year yield fell to 4.29%, steepening the two-year/30-year Treasury curve. Technology stocks also swung sharply, with the Nasdaq up 1.6% for the week as investors weighed hyperscaler earnings against another wave of AI investment.
US nonfarm payrolls will be in focus after last week’s Fed meeting. With less forward guidance from the Fed, the report will provide fresh insights into labor market conditions, wage growth and the outlook for inflation—and whether they remain consistent with our high-for-longer rate view.
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 30, 2026. Notes: The two ends of the bars show the lowest and highest res at any point year to date, and the dots represent current year-to-date res. Emerging market (EM), high yield and global corporate investment grade (IG) res are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.
Aug. 3
US ISM manufacturing and EU manufacturing PMI
Aug. 4
US job openings
Aug. 6
US initial jobless claims and Q2 productivity; China trade balance
Aug. 7
US payrolls
Read our past weekly commentaries here.
Intersecting mega forces
Since we launched our mega forces framework it has become clearer how their intersection shapes almost all our investment views and opens up alpha opportunities. They cut across asset class labels, spurring a rethink of portfolio construction. Investors need to be deliberate about the economic or thematic exposures they own, the vehicles they use to implement them and their investment horizons.
From drivers to portfolio expressions
Our highest conviction views, August 2026
| Driver | What we think | Portfolio expression |
|---|---|---|
| Growth and AI scarcity | The AI buildout is speeding up, making bottlenecks binding. | Overweight US equities; focus on AI bottleneck opportunities: power, chips and data centers. |
| Duration and diversification | Long bonds carry high rate sensitivity and are less reliable diversifiers. | Prefer short- and medium-term government bonds over long bonds for income. |
| Credit spreads and liquidity | Selectivity is crucial amid tight spreads and uneven fundamentals. | Credit with clear cash flows, lender protections and recovery value; higher-rated high yield. |
| Inflation and scarcity | Scarcity, secure supply and power demand carry inflation risks. | Infrastructure, energy bottlenecks, EM local debt and real-asset-linked exposures. |
| Alpha opportunity | Macro outcomes matter again in the new regime. | Macro hedge funds, venture capital, market-neutral strategies, and selected private credit and non-US alpha. |
Note: Views are from a US dollar perspective, August 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Asset class implications
Six- to 12-month tactical positioning, August 2026
This shows the implementation of our key investment views from the previous page through an asset class lens.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight. Strong corporate earnings, fueled by the AI buildout and a favorable macro backdrop, are outpacing higher interest rate expectations. | ||||
| Europe |  |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform. We favor financials, infrastructure, and industrials. | ||||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||||
| Japan | |
We are neutral. Strong corporate balance sheets and governance reforms remain supportive. We prefer targeted exposures to physical AI and the buildout’s bottlenecks. | ||||
| Emerging markets (EM) |  |
We are neutral. We see opportunities where the AI buildout drives demand for infrastructure, particularly in Latin America. | ||||
| China | |
We are neutral. We see opportunities in physical AI. Cheap, open-source AI could drive adoption, but that doesn’t necessarily translate into AI-provider profitability. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are neutral. We prefer short- and medium-term Treasuries, given the attractive risk-adjusted income on offer. | ||||
| Long US Treasuries |  |
We are underweight. We see investors wanting more compensation for holding long-term bonds amid persistent inflation and high debt loads. Long-duration bonds also are a less reliable portfolio diversifier in the new regime. | ||||
| Global inflation-linked bonds | |
We are neutral. We see inflation settling above pre-pandemic levels, but markets may not price this in the near term as economic growth could slow. | ||||
| Euro area government bonds |  |
We are overweight short- and medium-term bonds. Markets are pricing restrictive policy rates of about 3% for several years. We think that’s overdone. | ||||
| UK Gilts | |
We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive. | ||||
| Japanese government bonds |  |
We are underweight. Rate hikes, higher global term premium and heavy bond issuance will likely drive yields up further. | ||||
| China government bonds | |
We are neutral. China bonds offer stability and diversification but developed market yields are higher. A shift in investor sentiment toward equities limits upside. | ||||
| US agency MBS | |
We are overweight. Agency MBS offer higher income than Treasuries with similar risk and may offer more diversification amid fiscal and inflationary pressures. | ||||
| Short-term IG credit | |
We are neutral. Spreads are tight due to corporate strength; they could widen if issuance increases or risk appetite shifts. | ||||
| Long-term IG credit | |
We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds. | ||||
| Global high yield | |
We are neutral. High yield offers attractive income. We prefer higher-rated US and European high yield over investment grade and see dispersion of returns increasing. | ||||
| Asia credit | |
We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight. | ||||
| Emerging hard currency | |
We are neutral. Fundamentals have improved, but we see a more attractive risk-reward profile in EM local debt. | ||||
| Emerging local currency | |
We are overweight. We like the yield relative to its volatility and improving fundamentals. | ||||
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 US 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.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, August 2026
We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform and to justify a broad overweight. We stay selective, favoring financials, infrastructure, industrials, materials and healthcare. | ||
| Germany | |
We are neutral. Higher spending on defense and infrastructure support the corporate sector. Valuations are not stretched but neither compelling and expected earnings growth lags other countries. Light positioning means potential easing in geopolitical tensions and AI lifting industrials-driven earnings could create opportunities. | ||
| France | |
We are neutral. Strong expected earnings growth and global revenue exposure support French corporates. Valuations are less compelling, albeit not stretched versus euro area peers. Persistent political uncertainty leaves the overall risk reward balanced. | ||
| Italy | |
We are neutral. Earnings growth and momentum are strong, boosted by the significant exposure to financials, utilities and energy. Valuations are still at discount vs. peers, but not as much as in previous years. Political risk is currently low but likely to pick up ahead of 2027 elections. | ||
| Spain | |
We are overweight. Valuations remain attractive vs. peers even if relative earnings momentum has slowed. Strong domestic demand growth and exposure to fast-growing areas like Latin America support Spanish stocks. Financials, utilities and infrastructure-linked stocks would benefit from Europe’s push towards autonomy. | ||
| Netherlands | |
We are neutral. Earnings revisions in the IT sector, a large sector in the Dutch stock market is offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers. | ||
| Switzerland |  |
We are neutral. Valuations have improved, from stretched levels, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance. | ||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are overweight short- and medium-term bonds. Markets are pricing restrictive policy rates of about 3% for several years. We think that’s overdone. | ||
| German bunds | |
We are overweight shorter-term Bunds as the market-implied ECB policy path appears too hawkish. We stay neutral long-dated Bunds. Fiscal stimulus and increased bond issuance exert upward pressure on yields, alongside inflation risks amid lingering geopolitical tensions. | ||
| French OATs | |
We are neutral. Elevated political uncertainty, high budget deficits and slow structural reforms could stoke volatility, but these risks already seem priced into OATs and we don’t expect a material worsening from here. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given Italy’s large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and local demand for BTPs solid at current yield levels. Domestic disapproval would likely prevent defense spending from reaching fiscally unstable levels. Political uncertainty is likely to increase ahead of next year’s elections. | ||
| UK gilts | |
We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive. | ||
| Swiss government bonds | |
We are neutral. The SNB seems comfortable with its medium-term inflation outlook and its current policy stance. Market pricing is broadly in line with SNB messaging. | ||
| European inflation-protected securities | |
We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term. | ||
| European investment grade | |
European investment grade is supported by healthy corporate sector balance sheets, contained default rates and the persistently strong demand for durable income from European households. We prefer European investment grade over the US. | ||
| European high yield | |
We are overweight. While spreads are low, the income potential remains attractive. Defaults are contained and high yield is of higher quality and less sensitive to interest rate swings compared with the US. | ||
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 euro perspective, August 2026. 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.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Ehsan Khoman
Economist — BlackRock Investment Institute
Michel Dilmanian
Portfolio Strategist – BlackRock Investment Institute
This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.
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Sources: Bloomberg unless otherwise specified.
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