Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment strategist, Ben Powell – Chief Investment Strategist for the Middle East and APAC, and Michel Dilmanian – Portfolio Strategist, all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Immutable laws in play : Last week saw immutable laws limiting how far U.S. trade policy can go. Our leveraging up theme is also playing out with near-record bond issuance.
Market backdrop : U.S. stocks were flat in a volatile week marked by renewed geopolitical tensions. U.S. 10-year yields hit a four-month high. Gold soared 8% to new record highs.
Week ahead : We expect the Fed to leave interest rates unchanged this week. Mixed signals from recent jobs and inflation data justify a “wait-and-see” stance, in our view.
Developed market (DM) government bond yields jumped last week on fresh U.S. tariff threats. Japan’s bond selloff attracted headlines as yields hit record highs. But as the U.S. backed off from new tariffs on Europe, DM yields fell back: immutable economic laws – like the dependence on foreign financing of U.S. debt – came into play like last April. Our leveraging up theme plays out too, with record U.S. investment grade debt issuance for the first full week of January, per LSEG.
Bond markets have started 2026 in a bumpy fashion. DM government bond yields jumped, particularly in Japan, with historic spikes in 30- and 40-year yields. We see the jump as primarily a global story driven by renewed U.S. tariff threats to Europe. The quick walk-back of those threats underscored how geopolitics – and U.S. trade policy – is colliding with immutable economic laws that constrain policy swings. Another feature of this fixed income environment: an expected surge in U.S. corporate bond sales, partly tied to the AI buildout, with BlackRock’s global markets team seeing U.S. investment grade bond issuance hitting a record $1.85 trillion this year. See the chart. This shows the leveraging up theme from our 2026 Outlook at play: greater leverage can create vulnerabilities that expose the financial system to shocks like government bond yield spikes.
We think last week’s bond market volatility is ultimately a global story driven by U.S. tariff threats, with the impact amplified in the more-volatile Japanese government bond (JGB) market by technical factors: new fiscal worries after a snap election was called and a weak auction of long-term bonds. Yet U.S. trade policy again ran into an immutable economic law: the U.S.’s need for sizeable foreign investment to finance its debt in a world shaped by greater bond supply and higher-for-longer interest rates. Any spike in long-term bond yields can heighten debt sustainability concerns, repeatedly leading to a moderation of policy extremes over the past year. In this environment, bonds no longer provide the same level of portfolio ballast, keeping us tactically underweight long-term JGBs since 2023, and long-term U.S. Treasuries since December 2025.
Immutable economic laws can limit extreme outcomes
Also playing out in bond markets this year: our leveraging up theme. The risk of surging bond yields comes against a U.S. corporate sector leveraging up to fund the AI buildout. Unlike the public sector, U.S. corporates have room for more leverage. Public and private balance sheets have diverged sharply since the 2000s, with government debt surging to post-World War II highs while corporate leverage eases, U.S. government and LSEG data show. And unlike the run-up to the dot-com bubble, the mostly mega cap tech companies powering the AI buildout are issuing from a position of strength, we think. But more leverage throughout the financial system makes it more vulnerable to shocks, such as bond yield spikes tied to fiscal concerns like those that we saw in Japan last week and policy tensions between managing inflation and debt servicing costs.
This shapes our fixed income views. Greater investment grade (IG) bond issuance this year is one reason we prefer high yield bonds over IG, and within IG short-term over long-term credit. We like mortgage-backed securities offering similar risk but higher income versus U.S. Treasuries. We also like emerging market debt (EMD) that we see benefiting from EM countries delivering improved fiscal and monetary policy, as well as a weaker U.S. dollar. In private credit, we favor direct lending, especially established and large borrowers who can better underwrite deals, in our view.
Our bottom line
Immutable laws again limited policy extremes after a brief jump in bond yields. We are underweight long-term DM government bonds. We favor mortgage-backed securities, emerging market bonds and stay selective in credit.
Market backdrop
The S&P 500 slipped slightly in a volatile week but is still up about 1% this month. U.S. President Donald Trump threatened tariffs on European countries over Greenland before calling them off and saying an agreement had been struck. South Korean stocks rose 3% and have climbed 18% this year. U.S. 10-year Treasury yields jumped to a four-month high near 4.30%. Gold was the winner over geopolitical uncertainty, soaring 8% on the week to a fresh record.
The Fed’s rate decision is this week’s main event. We think the Fed will leave interest rates unchanged given mixed signals from recent jobs and inflation data. U.S. trade data for November will show if October’s trade deficit, a near two-decade low, will persist, potentially lifting expectations for 2025 GDP growth. Japan unemployment data will shed light on its tight labor market. We see room for more Bank of Japan hikes as it normalizes monetary policy.
Week Ahead
Jan. 27 : U.S. consumer confidence
Jan. 28 : U.S. Federal Reserve policy decision
Jan. 29 : U.S. trade balance; Japan unemployment
Jan. 30 : Euro area flash GDP, unemployment; U.S. PPI
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