The world’s largest asset manager, BlackRock Investments, said government bonds may not provide much protection in a recession if rising inflation pressures central banks to continue tightening monetary policy.
The fund added that government bonds are not a safe haven in light of the recession led by the central bank.
The world’s largest asset manager said the risks of a global recession increased as central banks around the world tightened monetary policy to lower consumer prices.
Scenario won’t work
BlackRock analysts say fears of deflation often drive investors out of relatively risky assets such as stocks and some corporate bonds and into government bonds.
Analysts said in a note that such a scenario is unlikely to be implemented if inflation remains high and central banks are forced to keep interest rates high.
outdated
“Investors usually take cover in sovereign bonds, but we see this recession evidence as outdated,” said strategists at BlackRock Investment Institute.
The result is that we remain below the weight of Treasury bonds, strategists added, adding that they expect government bond yields – which move inversely with prices – to continue to rise.
The benchmark 10-year US Treasury yield, which was about 1.5% at the start of the year, has risen to more than 4% this year, the highest since 2008, a trajectory that many other countries’ government bond yields have followed.
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The era is over
BlackRock said that while central banks usually ease monetary policy to boost economies when they show signs of deflation, “that era is over.
“Now, central banks are preparing to induce a recession through excessive tightening of policy,” the analysts added.
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Expectations
BlackRock expects long-term government bond yields to continue rising in developed markets.
She said central banks would eventually stop raising interest rates, but inflation rates would remain above targets, hampering their ability to start cutting rates.
Typical investment diversification strategies – including a traditional portfolio of 60% equities and 40% bonds – have underperformed this year as equities and bonds have been hit together by tighter monetary policies.