BlackRock upgrades US Treasuries, cites French bond sell-off as selectivity lesson

A theme running through bank research this week is that higher yields are now standard, but the context behind them is more important than the level, BlackRock's view supports this. For euro area bonds, near-term attention is on Moody's rating decision for France; a downgrade would likely put pressure on French debt and widen the spread over German Bunds. According to BlackRock, any contagion selling in markets like Spain could become an opportunity if fundamentals remain intact. The upgrade of US Treasuries indicates that BlackRock, the world's largest asset manager, sees value in long-dated US debt at current yields, which might limit further increases if other investors follow suit. The main risk that could drive yields even higher is a rising term premium stemming from fiscal concerns. Elevated energy costs related to the Iran war add to inflation risks that contribute to that premium.

Higher yields are everywhere, but BlackRock's message is that not all of them are worth having. The situation in France illustrates the distinction between being paid more and being paid enough, according to the asset manager.

Summary:

• BlackRock argues that the steep decline in French government bonds demonstrates why investors must comprehend what is behind rising yields.
• France's 10-year yield has climbed roughly 100 basis points since early August to close to 5%, and the expanding gap over German Bunds mirrors fiscal and political risks.
• According to BlackRock, the current environment is substantially different from the 2011-12 euro debt crisis, featuring stronger banks, more effective ECB instruments, and euro area debt at about 89% of GDP again.
• BlackRock upgraded US Treasuries last week, reduced its underweight stance on Japanese government bonds, and prefers local-currency debt from emerging markets, particularly in Latin America.
• For corporate credit, BlackRock favors higher-rated high-yield bonds and steers clear of both investment grade, which is under stress from significant AI-related issuance, and the weakest borrowers.
• This week, markets are awaiting Moody's rating decision on France and UK CPI data.

The sell-off in French government bonds serves as a reminder that not all higher yields are the same, BlackRock states, urging investors to become more selective as competition for capital grows.

As the world's largest asset manager and owner of iShares, the leading ETF provider, BlackRock's opinions are closely monitored. Shifts in its asset allocation can affect global market flows, and its weekly BlackRock Investment Institute research serves as a widely tracked indicator of institutional positioning.

In its most recent commentary, BlackRock noted that increasing government borrowing and AI-related investments are driving financing costs higher worldwide, subjecting borrowers with deteriorating fundamentals to greater scrutiny. France's 10-year yield has risen roughly 100 basis points since early August to almost 5%. While part of this reflects the global rate reset, BlackRock said the widening spread between French and German yields indicates that investors require additional compensation for France's fiscal and political risks.

BlackRock sees spillover risks from France but does not anticipate a recurrence of the 2011-12 euro debt crisis. France's government debt has increased from about 89% of GDP in 2011 to approximately 119% now, but the euro area's overall debt ratio has returned to around 89%, similar to 2011. The region also has stronger banks and more robust European Central Bank tools, although BlackRock noted that intervention is not assured. Indiscriminate selling might present opportunities in markets like Spain, the firm said, but it stays neutral on euro area government bonds for the time being.

Higher yields are also generating opportunities. According to BlackRock, over 80% of global bonds currently yield above 4%, versus roughly 6% five years ago. Last week, it upgraded US Treasuries, citing that higher initial yields offer a larger buffer against additional rate hikes and that markets may have overestimated Fed tightening. It also reduced its underweight stance on Japanese government bonds after long-term yields rose above 3%, and it prefers emerging market local-currency debt, especially in Latin America.

For corporate bonds, BlackRock favors higher-rated high-yield debt for income, staying away from both extremes of the credit spectrum. It said that heavy AI-related issuance is pressuring investment-grade bonds, while the riskiest borrowers encounter more difficult refinancing conditions.

BlackRock also highlighted last week's technology sell-off, during which worries about the speed of AI investment drove the Nasdaq down almost 5%. It continues to favor AI within a neutral position on US stocks.

The focus now shifts to Moody's credit rating decision for France, due on Friday, October 23, and to UK inflation data, which BlackRock will monitor for signals on global price pressures. It views an increase in the term premium, especially if caused by fiscal worries, as the primary risk that could drive yields higher.