BlackRock Cuts Inflation-Haven Bond Bet, Stays Bullish on Stocks

BlackRock Inc. is telling the bond market’s inflationistas not to get ahead of themselves.

Yes, inflation in the U.S. will continue to tick higher as the global economic rebound gets underway. But the fund giant is confident much of that is already priced in. What’s more, the reasons behind the recent upswing in inflation expectations -- supply constraints, pent-up consumer demand and excess savings -- are largely temporary, rather than things that may cause prices to spiral out of control.

As a result, the world’s largest asset manager shifted its tactical view on inflation-protected Treasuries, or TIPS, to neutral from overweight, and cut its underweight on nominal Treasuries, according to a note on Monday.

“We turn neutral TIPS following the sharp rise in inflation expectations since late year,” wrote Scott Thiel, chief fixed-income strategist, along with three other strategists. “Further increases seem unlikely in the near-term. We still see inflation pressures building over the medium term due to structural reasons.”

It’s not to say that BlackRock isn’t bullish on global growth. Far from it. The firm kept a pro-risk stance and is overweight equities, favoring smallcaps and emerging-market stocks. It also upgraded its position on developing-nation local currency debt due to “attractive valuations.”

In recent months, much has been made about the outlook for inflation, particularly in the bond market, as the U.S. poured trillions of dollars into its pandemic-ravaged economy.

The U.S. 10-year breakeven rate, a gauge of price-growth expectations derived from a yield gap between nominal and index-linked bonds, has risen to 2.38%, the most since 2013. Nominal yields have also climbed, with 10-year Treasury yields more than tripling from last year lows to 1.58%.

There are some signs of slowing demand for inflation index-linked securities. The $26.8 billion iShares TIPS ETF, the biggest product for inflation-protected bonds, saw investors pull almost $900 million in March after months of inflows.

While investors added more than $2.4 billion to inflation-protected bond ETFs so far in April, according to Bloomberg Intelligence, new cash has dwindled compared with the strong flows seen late last year.

©2021 Bloomberg L.P.

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