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BlackRock Commentary: The New Nominal Takes Shape

Jean Boivin, Head of the BlackRock Investment Institute 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.

We have long flagged the potential for higher inflation in the medium term, and markets have awoken to this prospect amid expectations for large U.S. fiscal stimulus. We don’t see this derailing the risk asset rally in the near term. We expect a muted response of nominal yields to inflation – our new nominal theme. This keeps us pro-risk, even as the road ahead could be bumpy due to virus dynamics.

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Source: BlackRock Investment Institute with data from Refinitiv, January 2021. Notes: Nominal yield is represented by the Refinitiv U.S. Benchmark 10-year Government Bond Index. Real yield is represented by the yield of the Refinitiv U.S. 10-year TIPS Inflation-linked Government Bond Index. Inflation expectation is calculated by subtracting real yield from nominal yield.


The policy revolution that started in early 2020 to cushion the blow of the Covid shock is a major driver behind the new nominal, one of our three investment themes for 2021. A key consequence is the potential for a more muted response of nominal yields to higher inflation, in our view. Pricing of inflation expectations has risen to its highest level since October 2018 – helping drive nominal 10-year Treasury yields to the highest levels since last March. Yet “real” yields, or inflation-adjusted yields, have largely held steady. See the green line in the chart above. We had expected a united Democratic government to potentially accelerate the new nominal, as significant fiscal support could bolster the economic restart. Recent market moves are consistent with that view. We see room for nominal yields to rise as inflation grinds higher, yet expect the Federal Reserve to lean against any sharp rises. As a result, we could see range-bound nominal yields in the near term, and real yields remaining deeply negative.

A key part of the policy revolution is the evolving policy framework of major central banks. The Federal Reserve has led the way by signaling a willingness to allow inflation overshoots to make up for past misses – while vowing to keep interest rates low for the foreseeable future. The Fed’s policy meeting this week will likely echo this view, while noting the weakening of economic conditions since the last meeting in December. Already, recent moves in yields suggest markets will likely test the Fed’s resolve to curb any excessive climb in nominal yields. This is part of the reason why we don’t see the rise in nominal yields as a straight line. One potential side effect of the huge surge in debt levels caused by the policy revolution: over time, raising interest rates could become more politically fraught for central banks, and the risk of  “taper tantrum” type events could complicate any attempts to normalize policy.

We see U.S. consumer price inflation in a range of 2.5%-3% over the next five years – still much higher than current market pricing. We see inflation triggered by two forces: higher production costs amid the remapping of global supply chains and new central bank frameworks that allow for inflation overshoots. Higher inflation and a limited rise in nominal yields should keep real yields negative, supporting risk assets. In this environment, the U.S. dollar could come under pressure as investors will likely seek higher-yielding assets outside of the U.S. We believe a stable or weaker dollar over the next 12 months supports emerging market assets.

The bottom line: We still expect the cumulative impact on economic activity from the Covid shock – what ultimately matters for asset prices – to be just fraction of that seen after the global financial crisis. This is despite a delay in the restart caused by a slow start of the vaccine rollout and the spread of more transmissible virus strains. We see stronger growth, higher inflation and low real yields ahead, as the vaccine-led restart eventually accelerates and central banks limit the rise of nominal yields. On the tactical horizon we are pro-risk overall, favoring equities and credit. Yet it is likely to be a bumpy road ahead for risk assets, in our view, as markets have made significant moves since late last year. On a longer-term, strategic horizon, we are neutral on equities given increased valuations. We also have a strategic underweight in nominal government bonds as we see their role in portfolios challenged by low yields and rising inflation.

Market Updates

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Past performance is not a reliable indicator of current or future results. Indexes are unmanaged It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, January 2021. Notes: The two ends of the bars show the lowest and highest returns over the last 12 months, and the dots represent returns compared with 12 months earlier. 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

U.S. stocks scaled new highs, as Democrat Joe Biden was sworn in as the 46th U.S. president in a peaceful transfer of power. Italy averted further political chaos as Prime Minister Giuseppe Conte survived a confidence vote in parliament. The early stages of the vaccine rollout have been slower than expected as more infectious strains of the virus are spreading, but we don’t see this materially changing the cumulative economic impact of the virus shock.

Week Ahead

  • January 19th:  Germany IFO Business Climate Survey
  • January 21st: U.S. consumer confidence
  • January 27th: Federal Open Market Committee policy meeting concludes
  • January 29th: U.S. personal consumption expenditures

This week’s U.S. consumer spending data will be a focus. The personal consumption expenditures (PCE) data, as part of the personal income and outlays release, could help markets gauge the pent-up demand that has accumulated in the U.S. as consumers have amassed a large savings buffer since last February. We expect the activity restart to accelerate later this year – and the pent-up demand will be key to determine the magnitude of the rebound.

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 Jan 25th, 2021 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.

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