The recent jump in US Treasury yields is a “benign adjustment” and ongoing negative real yields and the broadening US economic restart will still support equities and high-yield bonds, the BlackRock Investment Institute (BII) believes.
Last week the US 10-year Treasury yield jumped above 1.5% for the first time in three months, fueling the largest daily decline in the S&P 500 index since May.
But the BII team viewed the recent yield spike as a partial correction because of the COVID-19 economic recovery rather than a “hawkish pivot by central banks”.
“The market narrative that the spike in yields is driven by concerns about higher US policy rates misses the point, in our view. We see a more compelling driver: an overdue correction of the disconnect between low yield levels and the economic restart,” the BII said.
BII’s analysis pointed to an increase in the “term premium” for the yield spike, rather than changes to what investors thought would happen with inflation.
‘Term premiums’ referred to the demand investors had for holding longer-term government bonds and its relationship with yields was illustrated below.
US 10-year Treasury yield breakdown, 2012-2021
Source: BlackRock
“We believe higher term premia in this environment need not be bad news for equities, and still very negative real yields remain supportive of the asset class,” said the institute.
“Over the next six to 12 months we stay overall pro-risk even as we believe the path for further gains in risk assets has narrowed after an extended run higher and there could be bouts of volatility, including in the bond market.”
