10-year Treasury yield can keep climbing from 16-year highs, says world’s largest asset manager

As the benchmark 10-year Treasury yield established a fresh 16-year high above 4.5% on Monday, BlackRock Inc., the world’s largest asset manager, weighed in with the view that it could go even higher.

The in-house research arm of New York-based BlackRock
BLK,
-0.39%,
which managed roughly $9.4 trillion in assets at the end of the second quarter, said financial markets are coming around to the view that rates will likely stay high and that a volatile macro regime is bringing “uncertainty over central bank policy and risks ahead.” 

Long-term government yields jumped across the Americas and Europe on Monday as investors absorbed a higher-for-longer message on interest rates from the Federal Reserve and other central banks. On Monday, European Central Bank President Christine Lagarde told European Parliament lawmakers that borrowing costs will remain elevated for as long as needed. The Swiss National Bank is continuing to monitor inflation pressures and is not done with its war on inflation. And like the Fed, the Bank of England, which kept its main policy rate at 5.25% last week, wants markets to get on board with the higher-for-longer theme in rates, analysts said.

On Monday, the benchmark 10-year Treasury jumped 10.3 basis points to 4.541% — its highest closing level since Oct. 17, 2007. The 10-year rate is following the trajectory of the Federal Reserve’s main interest-rate target and returning to levels which prevailed during and before the early 2000s.

“Markets are coming around to our view that rates will stay high — and now even exceed our expectations in Europe. Rising long-term bond yields show markets are adjusting to risks in the new regime of greater macro and market volatility,” according to Jean Boivin, head of the BlackRock Investment Institute, and others. In a note released Monday, they indicated that their six- to 12-month tactical view is to remain underweight on U.S. and European equities. The former view is based on the opinion that “we don’t think earnings expectations reflect the macro damage we expect.”

Meanwhile, BlackRock has avoided joining the chorus of investors who’ve been bullish on long-dated Treasurys and enticed by the highest yields in more than a decade. “Our long-held underweight to long-term U.S. Treasuries has served us well as yields climb,” the BlackRock Investment Institute team wrote. “Markets have come around to our view on policy rates. Yet there is still little term premium. We prefer short-term Treasuries given comparable income to high-quality credit without the same credit or interest-rate risk.”

The continuing rise in yields reverberated across the financial market on Monday. All three major U.S. stock indexes
DJIA

SPX

COMP
finished higher after struggling for momentum over much of the New York session, while the ICE U.S. Dollar Index
DXY
rose 0.4%.