Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

BlackRock Commentary: Changing our government bond views

Mike Pyle, Global Chief Investment Strategist together with Elga bartsch, Head of Macro Research, Scott Thiel, Chief Fixed Income Strategist and Beata Harasim, Senior Investment Strategist all 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.


Markets are increasingly reflecting a unified Democratic government outcome that may lead to a significant fiscal expansion. This electoral outcome would bring forward the market pricing of the higher inflation regime that we were already reflecting in our strategic asset views. This is why, tactically, we are downgrading nominal U.S. Treasuries and upgrading their inflation-linked peers.

Article Image 1

Sources: BlackRock Investment Institute and Refinitiv Datastream, data as of Oct.12, 2020. Notes: U.S. 10-year nominal yield refers to the 10-year Treasury yield. Real yield refers to the yield of 10-year Treasury Inflation-Protected Securities (TIPS). Breakeven inflation rate refers to the difference between the yields of a nominal bond and an inflation-linked bond of the same maturity – the 10-year maturity in this case.

 

Developed market (DM) government bond yields collapsed after the Covid shock and since appear to have found a bottom. The economic restart has been quicker than expected, even though the hardest part of the recovery lies ahead. Significant fiscal stimulus under a united Democratic government – an election scenario that markets are increasingly pricing in – could put upward pressure on Treasury yields. Yet the rise in yields would likely be limited as the Fed would act to prevent a sharp tightening in financial conditions, in our view. We already expected rising inflation over the next few years, as production costs rise and the Fed has pledged to allow inflation overshoots and let the labor market run hot. The monetary-fiscal policy revolution may also place greater political constraints on the Fed’s ability to lean against inflation. We see the prospects of a unified Democratic government accelerating the market pricing of these dynamics. Breakeven inflation rates, a market-based measure of expected inflation, have rallied since March. See the green line in the chart. We see inflation-adjusted, or real yields, falling further, supporting prices of Treasury Inflation-Protected Securities (TIPS).

We are upgrading German government bonds (bunds) to neutral, reflecting our greater caution on Europe’s economic prospects. As Covid infections have picked up , the focus on further policy response has shifted to more monetary easing including additional asset purchases. Our views on bunds or U.S. Treasuries shouldn’t be considered in isolation. We believe nominal DM government bond prices are headed lower, and expect bunds to have more modest price declines than U.S. Treasuries. Bunds are also likely to be less volatile, in our view, thanks to large-scale ECB asset purchases that have driven net issuance into negative territory, as well as the potential for further monetary policy support.

These latest changes in our tactical views align with our strategic views. We favor reduced exposure to nominal DM government bonds and greater allocations to inflation-linked bonds over a longer horizon, as interest rates remain near  their lower bounds and inflation risks grow. We don’t expect nominal bond yields to rise as much as the inflation backdrop might typically imply, as central banks keep rates low and allow temporary overshoots of their inflation targets. This environment could persist for some time, providing a favorable backdrop for risk assets.

The result of next week’s U.S. election will further inform our tactical views. Democratic nominee and former Vice President Joe Biden has expanded his lead in national polls over President Donald Trump, and the likelihood of a Democratic sweep – winning the White House and the Senate – has risen. This outcome would have the most market impact as it would bring significant policy changes. The net difference in fiscal spending between a Democratic sweep and a Democratic presidency under divided government could be several percentage points of GDP over each of the next few years, we estimate.

Bottom line: We are downgrading nominal U.S. Treasuries to underweight and upgrading TIPS to overweight due to the growing likelihood of a sizable fiscal expansion, with a Fed likely leaning against major yield increases. We have closed our underweight in German bunds, anticipating their outperformance over U.S. Treasuries. We keep the rest of our tactical asset views unchanged for now, such as an overweight in the quality style factor in equities. A Democratic sweep outcome in the election would tip us to a more pro-risk stance, with implications for many of our granular asset views. A risk to our view: An election outcome that diminishes the likelihood of significant fiscal stimulus.

 

Market Updates

Article Image 2

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, October 2020. Notes: The two ends of the bars show the lowest and highest returns at any point this 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 gold, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI USA Index, Bank of America Merrill Lynch Global Broad Corporate Index, MSCI Emerging Markets Index, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index and spot Brent crude.

Market backdrop

We do not see the resurgence of Covid-19 as a replay of the spring. We believe daily new infections are likely a fraction of the peaks then, and rising case counts are having a diminishing negative impact on mobility. The economic restart has been quicker than expected, but the part that remains will be hardest. We do not expect a similarly large hit to economic activity as seen in the spring. But the economic restart now looks to face significant challenges in the near term. The other market focus: How the U.S. election result could shift U.S. fiscal stimulus, public investment, taxation, regulation and foreign affairs.

Week Ahead

  • October 26th: Germany ifo Business Index; U.S. new home sales
  • October 27th: U.S. Consumer Confidence Index
  • October 29th: ECB policy meeting; U.S. advance third-quarter GDP; German preliminary consumer price index
  • October 30th: Preliminary third-quarter GDP for Germany, Spain, France and Italy

The ECB policy meeting will be in focus. We expect the central bank to announce further monetary easing before the end of the year in order to fend off a further undershoot of its inflation objective. A string of data from Europe this week could shed light on the pace of the recovery, as Covid infections rise again in the region and threaten to derail the economic restart.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 26th, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Join MeDirect today to access the tools you need to put your money to work on your own terms.

Latest news articles

Our anchor in choppy markets
All News

BlackRock Commentary: Our anchor in choppy markets

Market narratives have shifted from AI excitement and recession fears to confidence in U.S. economic resilience, with a focus on supply-driven dynamics, prompting a risk-on stance, overweight in U.S. stocks, diversified AI investments, and flexibility in Japanese and Chinese equities.

free stuff that can help you save
All News

Free stuff that can help you save

Saving money is a challenge that can be made easier by taking advantage of free stuff that’s out there to help you keep living costs under control.

Epic Investment Partners Weekly Article
All News

Epic Investment Partners Views: The Week Ahead

This week’s key events include FOMC minutes, US CPI, PPI figures, and bank earnings, along with Eurozone and German economic data, while US inflation data ahead of the presidential election takes center stage; markets reacted strongly to the US jobs report, with treasury yields rising, oil prices spiking due to geopolitical tensions, and central bank chatter driving volatility, especially in the euro and sterling.

Experience better Banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. 


Sign up and open your account for free, within minutes.

MeDirect_Multi-Devices-cards

You are leaving medirect.com.mt

Please be aware that the external site policies, or those of another MeDirect website, may differ from this website’s terms and conditions and privacy policy. The next website will open in a new browser window or tab.

 

Note: MeDirect is not responsible for any content on third party sites, nor does a link suggest endorsement of those sites and/or their content.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.