BlackRock, the world's largest asset manager, has shifted its investment stance, cutting exposure to US equities and increasing its allocation to US Treasuries. The move comes as rising bond yields create more compelling income opportunities, according to the firm's latest market commentary.
The asset manager downgraded its US equity position to neutral from overweight, while upgrading its Treasury allocation to overweight from neutral. This marks a notable departure from its long-standing strategy, which had maintained an underweight position in US government bonds for most of the past six years.
Yields have climbed sharply in recent weeks, with the 10-year and 30-year Treasury yields reaching levels not seen since 2002. Higher energy costs, partly linked to the conflict in the Middle East, have contributed to the upward pressure on yields.
Opportunity in Short-Term Treasuries
BlackRock said the higher yields have improved the compensation investors receive for holding government debt, prompting it to increase Treasury exposure across the yield curve. The firm is particularly favoring shorter-term bonds, where it sees potential for market expectations of further Federal Reserve tightening to ease.
“Yields have reset toward our long-held higher-rates view, and we want to lock in some attractive income,” BlackRock said in its weekly commentary. The firm noted that markets are pricing in an additional 160 basis points of Fed rate hikes over the next 12 months, a level it considers excessive.
BlackRock is upgrading shorter-term Treasuries to overweight while moving longer-term Treasuries to neutral. The firm said higher yields now offer better compensation for the interest-rate risk associated with longer-duration bonds. The 10-year Treasury yield has risen by around 110 basis points this year to approximately 5.25%, compared with about 0.9% in October 2020, when BlackRock first adopted its underweight position.
BlackRock also estimates that Treasuries have a 75-basis-point cushion against further yield increases over the next 12 months before their total returns turn negative.
US Equity Exposure Reduced
The move into government bonds is being partly funded by taking profits on US equities, where BlackRock has shifted its stance from overweight to neutral. The firm has also moved its position in US agency mortgage-backed securities to neutral.
BlackRock, which manages more than $15.3 trillion in assets, described the equity adjustment as a short-term risk-management decision amid an uncertain market environment. The firm cited policy uncertainty and the potential for volatility around the artificial intelligence build-out as reasons to moderate its exposure to US stocks.
However, the change does not signal a broader retreat from equities or a reversal of its investment outlook. BlackRock said it remains prepared to increase risk again when market visibility improves and more attractive entry points emerge.
AI Outlook Maintained
Despite reducing its overall US equity allocation, BlackRock continues to favor AI-related companies and technology stocks. The firm said its fundamental conviction in artificial intelligence remains intact, with demand for the technology and limited availability of critical infrastructure supporting its investment outlook.
In its commentary, BlackRock said it was managing near-term risk rather than changing its core convictions. It also noted that higher interest rates are increasingly distinguishing companies capable of generating earnings and returns above their cost of capital.
The asset manager remains constructive on AI and expects underlying business performance to remain important even as market sentiment shifts. Analyst estimates compiled by FactSet indicate that S&P 500 third-quarter earnings are expected to grow by around 30% year over year.
This article is for informational purposes only and does not constitute financial advice.
