![](/sites/default/files/styles/1086x410/public/BLK-weekly.jpg?itok=jhUKjeh4)
Global Weekly Commentary: Seeking income and staying nimble
Tweaking our views
Markets are waking up to our expectation of more central bank rate hikes as inflation proves sticky. We go overweight U.S. short-term bonds for income.
Market backdrop
U.S. two-year Treasury yields jumped near 15-year highs – sparking an equity retreat – as Federal Reserve rate cuts later in the year were priced out.
Week ahead
Flash PMIs will show if activity is proving resilient at the start of the year. The PCE inflation data may confirm core inflation is staying persistently high.
We entered 2023 arguing the new macro regime required more nimble portfolios. A risk asset rally has stalled while markets have come around to our view of central banks hiking rates further to fight stickier inflation. This year’s moves prompt a tweak to our tactical views. We favor short-term government bonds for income. We trim our overweight to credit after spreads tightened. We go overweight emerging market (EM) stocks, adding to our relative preference over developed markets.
Yield is back
U.S. investment grade spreads and two-year Treasury yields, 2020-2023
Source: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2023. Notes: The chart shows the spread of U.S. investment grade corporate bonds over U.S. Treasury yields (dark orange line) and the two-year U.S. Treasury yield (yellow line).
Risk assets have jumped to start 2023 thanks to falling inflation, Europe’s easing energy shock, China’s rapid restart from Covid restrictions and technical factors that drove the quick move up. Yet we think the rally also reflects hopes that the sharpest central bank policy tightening in decades can avoid economic damage: growth will be sustained even if rates stay higher, and inflation will drop to 2% targets. Central banks then wouldn’t need to further tighten policy and create recessions to lower inflation. Now bond markets are waking up to the risk the Fed hikes rates higher and holds them there for longer. We boost our allocation to short-term government bonds on our six- to 12-month tactical horizon to take advantage of higher yields. See the chart. We balance that by reducing our overweight to investment grade credit. We go overweight EM equities and prefer them over DM equities, partly to get exposure to China’s rapid restart.
This is not a typical economic cycle – and that’s why we have argued a new investment playbook is needed. Recent data has shown that U.S. economic activity is holding up. Core inflation is proving stickier than many expected as confirmed by recent U.S. CPI data and revisions. The U.S. labor market remains tight with unemployment at its lowest in five decades. We don’t think inflation is on track to return to policy targets – and a recession would be needed to get it down. That means solid activity data should be viewed through its implications for inflation. In other words: Good news on growth now implies that more policy tightening and weaker growth later is needed to cool inflation. That’s bad news for risk assets, in our view.
Shifting views
We increase short-term Treasuries to an overweight. The jump in yields – the two-year U.S. Treasury yield is now near 4.6% compared with 1.5% a year ago – that now means short-term bonds provide income. We also like their ability to preserve capital at higher yields in this more volatile macro and market regime. We reduce our overweight to investment grade credit. Credit spreads have tightened sharply along with stocks pushing higher, reducing their relative attraction. We remain moderately overweight and still think highly rated companies will weather a mild recession well given stronger balance sheets compared with before the pandemic. We also cut agency mortgage-backed securities to neutral due to the spread tightening.
We have had a relative preference for EM equities over developed markets (DM) for some time. We add to this relative preference by going overweight EM. We prefer EM as their risks are better priced: EM central banks are near the peak of their rate hikes, the U.S. dollar is broadly weaker in recent months and China’s restart is playing out. That is in contrast to major economies that have yet to feel the full impact of central bank rate hikes – and yet still have a too-rosy earnings outlook, in our view. Plus, the risk is growing that DM central banks press ahead with more rate hikes. We see risks in EMs, too, but think they are better priced for now. EM equities would not be immune to any resulting risk asset selloff and U.S. dollar surge if the Fed keeps hiking rates. And China’s restart – like those seen in DM economies – doesn’t change the long-term drags on growth it faces. Investors are still requiring more compensation for the geopolitical risk of holding Chinese assets – which has risen, in our view – and also considering risks from regulatory and government intervention.
Our bottom line
We put into practice our new playbook of making more frequent changes to our tactical asset allocation. We lean further into short-term government bonds and our preference for EM equities over DM. We trim our overweight to investment grade credit and turn neutral on agency mortgage-backed securities.
Market backdrop
Two-year U.S. Treasury yields surged back near 15-year highs as markets priced out Fed rate cuts this year. The yield curve between two- and 10-year Treasuries inverted further to its most extreme levels since the early 1980s. The yield jump sparked a broad retreat in equities, with the S&P 500 falling for a second straight week. We think investors are realizing that sticky core inflation may mean the Fed hikes rates further – and holds them there for longer – than markets had expected.
We’re looking at flash PMIs in the U.S. and Europe for more signs of resilience. Stronger activity could reinforce expectations that further central bank tightening could be needed to bring inflation down to policy targets. We’re also watching the U.S. PCE report for confirmation of stickier core inflation as seen in the U.S. CPI.
Week ahead
Feb. 21
Global flash PMIs
Feb. 23
U.S. jobless claims
Feb. 24
U.S. PCE inflation and spending
Source
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of Feb. 17, 2023. Notes: The two ends of the bars show the lowest and highest returns at any point in the last 12-months, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, Refinitiv Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
© 2023 BlackRock, Inc. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Feb 21, 2023, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.
In the U.S. and Canada, this material is intended for public distribution. In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL, Tel: +44 (0)20 7743 3000. Registered in England and Wales No. 00796793. For your protection, calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. For qualified investors in Switzerland: This document is marketing material. This document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ("FinSA"). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. Blackrock Advisors (UK) Limited - Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit 06/07, Level 1, Al Fattan Currency House, DIFC, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738) In the Kingdom of Saudi Arabia, issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorised and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. The information contained within, does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. Any distribution, by whatever means, of the information within and related material to persons other than those referred to above is strictly prohibited. In the United Arab Emirates is only intended for - natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, no securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2023 BlackRock, Inc. All Rights Reserved. BLACKROCK, iSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
BIIM0223U/M-2748543