By David Barbuscia
NEW YORK, Oct 17 (Reuters) – Government bonds may not offer much recession protection if soaring inflation prompts central banks to continue tightening monetary policy, BlackRock Investment said. Institute.
The risks of a global recession have increased as the world’s central banks tighten monetary policy to lower consumer prices.
Fears of a slowdown would generally drive investors away from relatively risky assets such as equities and some corporate bonds in favor of government bonds. But such a scenario is unlikely to materialize if inflation remains high and central banks are forced to keep interest rates high, strategists at the BlackRock Investment Institute said in a note on Monday.
“Investors have traditionally hedged in sovereign bonds, but we view this recession playbook as obsolete…Result: We remain underweight Treasuries,” they said, adding that they expect that government bond yields – which move inversely to prices – continue to rise.
Benchmark 10-year US Treasury yields, which were around 1.5% at the start of the year, have jumped to more than 4% this year, their highest level since 2008, a trajectory followed by yields government bonds of many other countries.
While central banks have typically eased monetary policy to stimulate economies when they showed signs of contraction, “Those days are over. Now central banks are poised to cause recessions by excessively tightening policy,” he said. said BlackRock, the world’s largest asset manager.
The firm expects long-term government bond yields to continue to rise in developed markets. Central banks will eventually halt rate hikes, but inflation rates will remain above target, hampering their ability to initiate rate cuts, he said.
Typical investment diversification strategies – including the traditional portfolio weighted 60% stocks and 40% bonds – have underperformed this year as stocks and bonds have been hit by tighter monetary policies.
BlackRock expects the correlation between bonds and stocks to remain positive, meaning bonds are unlikely to protect investors from declines in stock valuations.
“We don’t think long-term yields reflect the likely persistence of inflation and the resulting higher term premia… Policy rates would need to hold steady or fall for Treasury yields to turn positive,” a- he declared. (Report by Davide Barbuscia Editing by Tomasz Janowski)