BlackRock has reduced its exposure to US equities and increased its allocation to US Treasuries as rising bond yields create more attractive income opportunities.
The world’s largest asset manager cut its stance on US equities to neutral from overweight and upgraded its position in Treasuries to overweight from neutral, according to its latest market commentary.
The shift marks a change in a long-standing investment strategy.
BlackRock said its underweight position in US government bonds had been a portfolio mainstay for most of the past six years, with only occasional moves to neutral.
Yields have risen sharply in recent weeks, with the 10-year and 30-year Treasury yields reaching levels last seen in 2002.
Higher energy costs linked to the conflict in the Middle East have contributed to the increase.
BlackRock sees opportunity in short-term Treasuries
BlackRock said higher yields have improved the compensation investors receive for holding government debt, prompting it to increase its Treasury exposure across the yield curve.
The asset manager is particularly favouring shorter-term bonds, where it sees scope for market expectations of further Federal Reserve tightening to ease.
“Yields have reset toward our long-held higher-rates view, and we want to lock in some attractive income,” BlackRock said in its weekly market commentary.
The firm said markets were pricing in an additional 160 basis points of Fed rate hikes over the next 12 months, a level it considers excessive.
BlackRock is upgrading shorter-term Treasuries to overweight while moving longer-term Treasuries to neutral.
The firm said higher yields now offer better compensation for the interest-rate risk associated with longer-duration bonds.
The 10-year Treasury yield has risen by around 110 basis points this year to approximately 5.25%, compared with about 0.9% in October 2020, when BlackRock first adopted its underweight position.
BlackRock also estimates that Treasuries have a 75-basis-point cushion against further yield increases over the next 12 months before their total returns turn negative.
US equity exposure reduced amid market volatility
The move into government bonds is being partly funded by taking profits on US equities, where BlackRock has shifted its stance from overweight to neutral.
The firm has also moved its position in US agency mortgage-backed securities to neutral.
BlackRock, which manages more than $15.3 trillion in assets, described the equity adjustment as a short-term risk-management decision amid an uncertain market environment.
The firm cited policy uncertainty and the potential for volatility around the artificial intelligence build-out as reasons to moderate its exposure to US stocks.
However, the change does not signal a broader retreat from equities or a reversal of its investment outlook.
BlackRock said it remains prepared to increase risk again when market visibility improves, and more attractive entry points emerge.
BlackRock maintains its AI investment outlook
Despite reducing its overall US equity allocation, BlackRock continues to favour AI-related companies and technology stocks.
The firm said its fundamental conviction in artificial intelligence remains intact, with demand for the technology and limited availability of critical infrastructure supporting its investment outlook.
In its commentary, BlackRock said it was managing near-term risk rather than changing its core convictions.
It also noted that higher interest rates are increasingly distinguishing companies capable of generating earnings and returns above their cost of capital.
The asset manager remains constructive on AI and expects underlying business performance to remain important even as market sentiment shifts.
Analyst estimates compiled by FactSet indicate that S&P 500 third-quarter earnings are expected to grow by around 30% year over year.
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