By Davide Barbuscia
NEW YORK (Reuters) – Long-term U.S. Treasury yields may still have room to rise but they could swing in both directions in the near term as inflation eases and the Federal Reserve nears a peak in interest rates, the BlackRock Investment Institute said on Monday.
The institute, an arm of the world’s largest asset manager BlackRock, said it had turned “neutral” on long-term Treasuries on a six-to-12-month horizon from a previous underweight recommendation.
Treasury yields, which move inversely to prices, have risen sharply since the U.S. central bank started raising interest rates in March 2022 to fight a surge in inflation. Long-term bond yields have recently hit highs not seen in more than a decade and a half as a surprisingly resilient economy raised the prospect that interest rates will remain higher for longer.
“The repricing of Federal Reserve policy rates has been a big part of the yield move … since the Fed’s first hike in 2022. We see the yield surge driven by expected policy rates nearing a peak,” the BlackRock Investment Institute said in a note.
On a long-term basis, however, it remained underweight as it expects investors will ask for more compensation to hold long-term paper due to factors such as persistent inflation, rising fiscal deficits and increasing government bond issuance.
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“Rising term premium will likely be the next driver of higher yields. We think 10-year yields could reach 5% or higher on a longer-term horizon,” it said.
Benchmark 10-year Treasury yields were at around 4.7% on Monday, down from a peak of 4.887% hit earlier this month – the highest they have been since 2007.
The investment institute has been underweight long-term U.S. government bonds since late 2020 as it expected yields to rise. “U.S. 10-year yields at 16-year highs show they have adjusted a lot – but we don’t think the process is over,” it said.
While Treasury yields have risen since the Fed started hiking rates, investment grade credit spreads – or the premium investors demand to hold corporate debt rather than safer government bonds – have tightened.
The institute said it had become more bearish on investment grade credit over the next six to 12 months “due to limited compensation above short-dated government bonds.”
(Reporting by Davide Barbuscia; Editing by Paul Simao)