BlackRock Shifts to 'Neutral' on Long-Term Treasurys Ahead of Fed Rate Cuts

BlackRock Adjusts Its Position on Long-Term Treasurys

BlackRock has shifted its stance on long-term U.S. Treasury bonds, moving to a neutral position for the next 6-12 months. This change comes as investors anticipate that the Federal Reserve may soon resume its interest-rate-cutting cycle. Jean Boivin, head of the BlackRock Investment Institute, outlined this shift in a recent note, indicating that the firm had previously been underweight in long-term Treasurys.

Boivin explained that while structural factors such as loose global fiscal policy continue to push yields higher, there is potential for yields to decline in the near term. The Fed’s decision to cut rates could be justified by the current soft labor market, which may help ease inflation pressures. However, the macroeconomic landscape remains uncertain, with inflation still above the Fed's 2% target.

A Complex Economic Outlook

The current economic environment is described as “murky,” with BlackRock noting the possibility of a “no hiring, no firing” state. In this scenario, Fed rate cuts could stimulate hiring, but inflation may remain elevated. Despite these concerns, BlackRock maintains a “risk-on” stance, expecting that rate cuts will support stock markets and long-term bonds.

This outlook is based on the belief that U.S. economic growth will hold up even as it slows, and corporate earnings will remain strong. Boivin highlighted that market dynamics have shifted from concerns over tariffs and policy uncertainty to a focus on the balance between inflation, growth, and government debt.

Strategic and Tactical Views

On a longer-term strategic horizon of five years, BlackRock remains cautious about long-term government bonds. The firm prefers inflation-linked bonds, citing concerns about the impact of persistent inflation. Core inflation, which excludes food and energy prices, has shown signs of being “sticky.” August data from the consumer-price index revealed a 0.3% increase in core inflation, translating to an annual rate of 3.1%.

BlackRock acknowledges the need to prepare for various macroeconomic scenarios. While its base case assumes that Fed rate cuts on a soft labor market will be positive for equities and support long-term bonds, the firm is also considering alternative outcomes. If the labor market weakens further, rate cuts may not be sufficient to protect risk assets, prompting a potential reduction in risk exposure.

Conversely, a rebound in hiring could reignite inflation pressures, leading to renewed scrutiny of the Fed’s independence. This could result in investors demanding more compensation for holding long-term bonds.

Market Performance and Outlook

The U.S. stock market saw gains on Monday, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all rising. The S&P 500 and the technology-heavy Nasdaq reached new record highs, reflecting investor optimism amid the anticipation of potential Fed rate cuts.

As the Fed prepares to announce its decision at the conclusion of its policy meeting, the market remains closely watching the 10-year Treasury yield. This yield declined by 2.3 basis points on Monday, reaching 4.034%, although it remained above its 52-week low of 3.622% recorded in September.

BlackRock’s updated tactical view includes a shift to a neutral position on short-term Treasurys, moving from an overweight stance. This reflects the firm’s evolving assessment of the bond market and its expectations for future monetary policy actions.

Overall, the financial landscape is marked by uncertainty, with investors and analysts closely monitoring developments in both the bond and equity markets. As the Fed considers its next move, the implications for the broader economy and financial instruments remain a key area of focus.