Why the world's No. 1 fund manager has just changed its mind on bonds for the first time in six years

By Barbara Kollmeyer

BlackRock lowers its rating on U.S. stocks

BlackRock Investment Institute says it's time to take advantage of rising bond yields.

Earnings season kicks off Tuesday with big banks in focus, but tech is stealing the spotlight, with that sector set to continue selling off following an alarming slump in Korean chip stocks.

Tech has been the main driver behind the S&P 500's SPX bull market, which has now entered a fourth year. The index has carved out much of its 14% gain this year in the spring, bouncing off April lows. It has been a grind ever since, with the S&P 500 up around 2.6% between June and Monday's close of 7,807. That's as Treasury yields across the maturity curve are hovering at two-decade highs.

Our call of the day from BlackRock says those bond yields can no longer be ignored, and the world's largest asset manager is now shifting money into Treasurys - specifically shorter-term paper - while taking some U.S. equity exposure off the table.

"Higher yields and potentially excessive Fed tightening expectations create room to unwind our U.S. Treasury underweight - a mainstay for most of the last six years," a team led by Jean Boivin, head of BlackRock Investment Institute, the asset manager's think tank, told clients in a note on Monday. "Now, yields have reset toward our long-held higher-rates view, and we want to lock in some attractive income."

Shorter-term Treasurys are being upgraded to overweight, and long-term Treasurys to neutral, "as higher yields now provide better compensation for interest-rate risk." The yield on 10-year Treasurys BX:TMUBMUSD10Y sat near 0.9% in October 2020, when BlackRock first went underweight, but are currently at 5.197%. The yield on 2-year Treasurys BX:TMUBMUSD02Y has climbed from 0.16% in 2020 to 4.778% currently, a level last seen in 2007.

Markets are pricing in an additional 160 basis points of Fed rate hiking over the next 12 months, but BlackRock sees that move as overdone. The team there said that with the term premium - the extra return demanded by investors to hold longer-term Treasurys - averaging around 75 basis points since September, higher yields are "offering a more attractive entry point."

With yields at multidecade highs, investors have a built-in cushion, and those would have to climb another 75 basis points before returns are no longer positive, according to BlackRock.

Bond investors are earning an inflation-adjusted return not seen in decades.

The money going into Treasurys is being funded in part by closing out a long-held overweight posture in U.S. equities and shifting to neutral "to manage potential volatility around the AI build-out."

Boivin and his team insist they are "managing near-term risk" and not changing their core convictions - they see the AI transformation as intact. "Higher rates are increasingly differentiating companies by their ability to generate earnings and returns above the cost of capital."

"We still favor AI-related companies and listed infrastructure, where growing demand and scarcity in critical infrastructure support attractive returns. Existing infrastructure could grow even more valuable amid this scarcity," they said.

Even if the narrative around AI swings around, the investment-institute team sees fundamentals prevailing, noting how S&P 500 third-quarter earnings are expected to grow 30% on a year-over-year basis, based on analyst estimates compiled by FactSet.

The BlackRock Investment Institute has adjusted its positioning on U.S. equities a "handful of times" in recent years, mostly between overweight and neutral, a spokesman for the institute said in emailed comments. It held an overweight for close to a year before moving to neutral in March but then shifted to overweight on U.S. stocks in April.

The markets

Dow industrial futures (YM00) are higher, while those for the Nasdaq-100 (NQ00) are lower and S&P 500 futures (ES00) are flat. Oil prices (CL.1) (BRN00) are down over 1%, and Treasury yields BX:TMUBMUSD10Y are easing.

 
Key asset performance                                                 Last       5d      1m       YTD     1y 
S&P 500                                                               7,807.24   0.43%   2.46%    14.05%  17.32% 
Nasdaq Composite                                                      27,245.90  -0.84%  4.05%    17.23%  20.05% 
10-year Treasury                                                      5.196      -11.60  20.80    102.40  116.00 
Gold                                                                  4,208.9    0.39%   -2.87%   -2.85%  1.19% 
Oil                                                                   92.1       2.44%   -12.68%  60.43%  57.19% 
Data: MarketWatch. Treasury yields change expressed in basis points. 

The buzz

Big banks are reporting results, and JPMorgan Chase's (JPM) missed expectations, while Wells Fargo's (WFC) narrowly beat them. Follow live coverage of third-quarter bank earnings.

UnitedHealth (UNH) reported forecast-beating results and lifted its outlook. Shares are up.

A two-day slump in microchip stocks is partly being blamed on comments by Broadcom (AVGO) CEO Hock Tan, who reportedly compared AI investors to casino gamblers. That and concerns over China competition led to a 5% slump for the Korean stock-market benchmark Kospi KR:180721 on Tuesday.

The latest data on U.S. existing-home sales are scheduled for 10 a.m.

The Richmond Fed's president, Thomas Barkin, will speak at 1 p.m., and the monthly U.S. Treasury balance for September is due at 2 p.m.

This one chart from the IMF tells the entire story of the world economy this year.

The chart

Bank of America's October survey of global fund managers revealed a net 31% of respondents consider the biggest tail risk for markets - a rare event that can trigger losses for investors - to be a "disorderly rise in bond yields." An AI bubble was ranked second, according to 23% of respondents, and a second wave of inflation was third, cited by 20% of respondents, with a hyperscaler credit event seen as that big risk by 11%.

Top tickers

These were the most frequently searched ticker symbols on MarketWatch as of 6 a.m.:

 
Ticker symbol  Security name 
NVDA           Nvidia 
GME            GameStop 
TSLA           Tesla 
MU             Micron 
SPCX           SpaceX 
AMZN           Amazon 
AMD            Advanced Micro Devices 
TSM            Taiwan Semiconductor Manufacturing 
AAPL           Apple 
MSFT           Microsoft 

-Barbara Kollmeyer

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(END) Dow Jones Newswires

10-13-26 0728ET