Immutable laws keeping us risk-on
Market take
Weekly video_20260120
Nicholas Fawcett
Senior Economist, BlackRock Investment Institute
Opening frame: What’s driving markets? Market take
Camera frame
Title slide: Immutable economic laws back in play
Mega forces were a major driver of financial markets and macro in 2025. That’s playing out again this year, and we’re watching one key indicator: long term Treasury yields. They haven’t declined like they did historically when the Fed cut interest rates.
1: Stuck In place
That’s partly because investors are demanding more compensation for the risk of holding long-term US bonds, or term premium. Why? One reason is high and rising debt burdens, which mean more bond issuance. And that’s structural – not a short-term cyclical development.
Though we saw something similar in 2025, ensuing data showed a softening labor market which gave the Fed cover to cut rates. Now market attention is back on concerns about central bank independence.
2: Renewed policy tension
December jobs data indicated that the US is still in the “no hiring, no firing” stasis we’ve previously described, and doesn’t look at risk of a sudden deterioration.
And wage gains and core services inflation suggest there’s a risk that inflation persists above the Fed’s 2% target.
That could lead to fresh policy tensions between inflation and debt sustainability and spark investors demanding even more term premium.
But we think immutable economic laws are still at play, because any rapid rise in long-term yields would quickly impact debt sustainability.
3: The demand for higher term premium
We’ve long expected investors to demand more term premium, driven by looser fiscal policy, greater bond market volatility and heightened inflation uncertainty.
In fact, we see US term premium doubling over a five-year horizon but that move could be quicker or larger than we expect. And higher term premium isn’t automatically negative for equities, in our view. What matters is the relative preference that investors have and how they are assessing risk.
Outro: Here’s our Market take
Renewed market worries over Fed independence underscore our underweight to long-term Treasuries on a tactical and strategic horizon. We think investors need to stay nimble and ready with a plan B, as outlined in our 2026 Global Outlook.
Closing frame: Read details: blackrock.com/weekly-commentary
Fresh worries about Federal Reserve independence highlight how immutable economic laws can limit policy extremes. We stay underweight US bonds.
The S&P 500 was little changed as the fourth-quarter earnings season kicked off. US Treasury yields remained in a tight range of 4.10%-4.20%.
We look to global flash PMIs for a reading on worldwide activity in a quiet data week. We also keenly watch the snap election in Japan.
Our pro-risk stance is shaped by mega forces and the AI theme driving markets and the macro – and that is playing out in early 2026. We still see a softer US labor market and lower inflation allowing the Federal Reserve to keep cutting rates - though renewed worries over Fed independence could challenge our view. We stay underweight long-term US bonds on both tactical and strategic horizons. But immutable economic laws tied to debt servicing costs can limit policy extremes.
Stuck in place
Change in US 10-year yields from the start of Fed rate cut cycles since 1984
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, with data from LSEG Datastream, January 2026. Note: The lines show the difference in 10-year US Treasury yields before and after the Federal Reserve’s first interest rate cut in cutting cycles.
Mega forces like AI driving markets and the macro while the Fed still has cover to keep cutting interest rates are keeping us pro-risk. We think today’s macro environment still supports our view that lower inflation and a softer labor market allow it to do so. Renewed concerns over Fed independence after the investigation of Fed Chair Jerome Powell may challenge that view. Yet we see immutable economic laws, such as the need to finance US debt, serving as a guardrail. US 10-year Treasury yields haven’t dropped as they have historically when the Fed cuts rates – and are still higher since rate cuts started. See the chart. That reflects investors demanding more compensation for the risk of holding long-term US bonds, or term premium, due to worries over fiscal sustainability and debt servicing costs even before the latest Fed independence concerns.
Sticky inflation may limit how much the Fed can cut rates this year beyond what markets forecast. The December data confirmed that the US labor market is still in the “no hiring, no firing” stasis we’ve previously described and doesn’t look at risk of a sudden deterioration. Yet wage gains and core services inflation point to risks that inflation stays above the Fed’s 2% target. We see the potential for renewed policy tensions between inflation and debt sustainability that could spark investors demanding more term premium. But we think immutable economic laws are still at play and could curb policy changes: that any rapid rise in long-term yields would quickly impact debt sustainability.
Powerful mega forces can trump the macro
Developments like policy uncertainty or fiscal concerns mainly transmit through the cost of capital channel by lifting risk premia, in our view. We see that transmitting clearly today in US Treasuries: concerns over the US fiscal outlook and worries over Fed independence that began last year have pushed the term premium higher over the past 18 months. The same mechanism shows up in equities via the equity risk premium – our preferred valuation metric that accounts for the interest rate environment. The return on capital channel – profitability and a firm’s ability to return cash – can also drive relative performance but typically only after more durable shifts. What matters for our positioning is whether a development has a meaningful, lasting impact on these channels and markets broadly. We would lean against moves where we don’t see a sustained impact, such as short-term market reactions to geopolitical events that ultimately prove contained.
This all reinforces why this environment calls for a nimble approach and plan B for portfolios based on scenarios when many potential outcomes are possible. We stay pro-risk as we think the AI theme has more room to run – even as geopolitical fragmentation and potential diminishing trust in institutions could lead to a reevaluation of global risk premia.
Our bottom line
Fed independence worries reinforce our underweight to long-term Treasuries. We stay pro risk on mega forces like AI and a macro backdrop that should allow the Fed to keep cutting rates – and prefer equities over government bonds.
Market backdrop
The S&P 500 was little changed overall at the start of fourth-quarter earnings season, with tech stocks lagging to start the year. Even with all the headlines of potential US policy changes, markets have been relatively muted. US Treasury yields have been in a range of 4.10-4.20% since the start of December. Yet Japanese ultra-long bond yields have kept hitting all-time highs on expectations for looser fiscal policy as the prime minister is expected to call a new election.
On a quieter data week, we are looking at what global flash PMIs say about global activity. Otherwise, the focus is on Japan where the expected snap election may pave the way for the ruling Liberal Democratic Party to pursue looser fiscal policy and add more pressure to global long-term bond yields. We are also looking to see if at-target euro area inflation keeps the European central bank on hold.
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 January 15, 2026. 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 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.
Euro area inflation; China GDP
UK CPI
US PCE
Global flash PMIs; Japan CPI; Bank of Japan policy decision
Read our past weekly commentaries here.
Big calls
Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, January 2026
| Reasons | ||
|---|---|---|
| Tactical | ||
| Still favor AI | We see the AI theme supported by strong earnings, resilient profit margins and healthy balance sheets at large listed tech companies. Continued Fed easing into 2026 and reduced policy uncertainty underpin our overweight to US equities. | |
| Select international exposures | We like Japanese equities on strong nominal growth and corporate governance reforms. We stay selective in European equities, favoring financials, utilities and healthcare. In fixed income, we prefer EM due to improved economic resilience and disciplined fiscal and monetary policy. | |
| Evolving diversifiers | We suggest looking for a “plan B” portfolio hedge as long-dated US Treasuries no longer provide portfolio ballast – and to mind potential sentiment shifts. We like gold as a tactical play with idiosyncratic drivers but don’t see it as a long-term portfolio hedge. | |
| Strategic | ||
| Portfolio construction | We favor a scenario-based approach as AI winners and losers emerge. We lean on private markets and hedge funds for idiosyncratic return and to anchor portfolios in mega forces. | |
| Infrastructure equity and private credit | We find infrastructure equity valuations attractive and mega forces underpinning structural demand. We still like private credit but see dispersion ahead – highlighting the importance of manager selection. | |
| Beyond market cap benchmarks | We get granular in public markets. We favor DM government bonds outside the US Within equities, we favor EM over DM yet get selective in both. In EM, we like India which sits at the intersection of mega forces. In DM, we like Japan as mild inflation and corporate reforms brighten the outlook. | |
Note: Views are from a US dollar perspective, January 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.
Tactical granular views
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, January 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 | ||||||
| United States |  |
We are overweight. Strong corporate earnings, driven in part by the AI theme, are supported by a favorable macro backdrop: continued Federal Reserve easing, broad economic optimism and less policy uncertainty, particularly on the trade front. | ||||
| Europe |  |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for recent outperformance to continue and to justify a broad overweight. We stay selective, favoring financials, utilities and healthcare. | ||||
| 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 overweight. Strong nominal GDP, healthy corporate capex and governance reforms – such as the decline of cross-shareholdings – all support equities. | ||||
| Emerging markets | |
We are neutral. Economic resilience has improved, yet selectivity is key. We see opportunities across EM linked to AI and the energy transition and see the rewiring of supply chains benefiting countries like Mexico, Brazil and Vietnam. | ||||
| China | |
We are neutral. Trade relations with the US have steadied, but property stress and an aging population still constrain the macro outlook. Relatively resilient activity limits near-term policy urgency. We like sectors like AI, automation and power generation. We still favor China tech within our neutral view. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are neutral. We see other assets offering more compelling returns as short-end yields have fallen alongside the US policy rate. | ||||
| Long US Treasuries |  |
We are underweight. We see high debt servicing costs and price-sensitive domestic buyers pushing up on term premium. Yet we see risks to this view: lower inflation and better tax revenues could push down yields near term. | ||||
| Global inflation-linked bonds | |
We are neutral. We think inflation will settle above pre-pandemic levels, but markets may not price this in the near-term as growth cools. | ||||
| Euro area government bonds | |
We are neutral. We agree with market forecasts of ECB policy and think current prices largely reflect increased German bond issuance to finance its fiscal stimulus package. We prefer government bonds outside Germany. | ||||
| UK Gilts | |
We are neutral. The recent budget aims to shore up market confidence through fiscal consolidation. But deferred borrowing cuts could bring back gilt market volatility. | ||||
| 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 and investor sentiment shifting towards 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. Corporate strength means spreads are low, but they could widen if issuance increases and investors rotate into US Treasuries as the Fed cuts. | ||||
| 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 more attractive carry in an environment where growth is holding up – but we think dispersion between higher and weaker issuers will increase. | ||||
| Asia credit | |
We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight. | ||||
| Emerging hard currency | |
We are overweight. A weaker US dollar, lower US rates and effective EM fiscal and monetary policy have improved economic resilience. We prefer high yield bonds. | ||||
| Emerging local currency | |
We are neutral. A weaker US dollar has boosted local currency EM debt, but it’s unclear if this weakening will persist. | ||||
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, January 2026
| 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 recent outperformance to continue and to justify a broad overweight. We stay selective, favoring financials, utilities and healthcare. | ||
| Germany | |
We are neutral. Increased spending on defense and infrastructure could boost the corporate sector. But valuations rose significantly in 2025 and 2026 earnings revisions for other countries are outpacing Germany. | ||
| France | |
We are neutral. Political uncertainty could continue to drag corporate earnings behind peer markets. Yet some major French firms are shielded from domestic weakness, as foreign activity accounts for most of their revenues and operations. | ||
| Italy | |
We are neutral. Valuations are supportive relative to peers. Yet we think the growth and earnings outperformance that characterized 2022-2023 is unlikely to persist as fiscal consolidation continues and the impact of prior stimulus peters out. | ||
| Spain | |
We are overweight. Valuations and earnings growth are supportive relative to peers. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI. High exposure to fast-growing areas like emerging markets is also supportive. | ||
| Netherlands | |
We are neutral. Technology and semiconductors feature heavily in the Dutch stock market, but that’s offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers. | ||
| Switzerland |  |
We are neutral. Valuations have improved, 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 U.S., but we see few near-term catalysts to trigger a shift. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to US Treasuries. Peripheral bond yields have converged closer to core yields. | ||
| German bunds | |
We are neutral. Potential fiscal stimulus and bond issuance could push yields up, but we think market pricing reflects this possibility. Market expectations for near-term policy rates are also aligned with our view. | ||
| French OATs | |
We are neutral. France faces continued challenges from elevated political uncertainty, high budget deficits and slow structural reforms, but these risks already seem priced into OATs and we don’t expect a worsening from here. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given its large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. Domestic political pushback likely prevents defense spending from rising to levels that would resurface fiscal stability concerns. | ||
| UK gilts | |
We are neutral. Gilt yields are off their highs, but we expect more market attention on long-term yields through the government’s November budget, given the difficulty it has had implementing spending cuts. | ||
| Swiss government bonds | |
We are neutral. Markets are expecting policy rates to return to negative territory, which we deem unlikely. | ||
| 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 | |
We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the US Quality-adjusted spreads have tightened significantly relative to the US, but they remain wider, and we see potential for further convergence. | ||
| European high yield | |
We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality and less sensitivity to interest rate swings compared with the US Spreads adequately compensate for the risk of a potential rise in defaults, in our view. | ||
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, January 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
Wei Li
Roelof Salomons
Nicholas Fawcett
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.
© 2026 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.
