BlackRock Warns: Fed to Remain on Hold Next Year, Investors Should Favor Global Bonds Over Long-Term Treasuries

BlackRock Warns: Fed to Remain on Hold Next Year, Investors Should Favor Global Bonds Over Long-Term TreasuriesJean Boivin, head of BlackRock Investment Institute (BII), recently stated in an interview that the Federal Reserve will likely remain on hold next year due to persistent inflation, advising investors to favor global bonds over long-term US Treasuries. He argued that the current market environment isn't the start of an easing cycle, but rather an adjustment or recalibration, with the Fed unlikely to accommodate the market with rate cuts

BlackRock Warns: Fed to Remain on Hold Next Year, Investors Should Favor Global Bonds Over Long-Term Treasuries

Jean Boivin, head of BlackRock Investment Institute (BII), recently stated in an interview that the Federal Reserve will likely remain on hold next year due to persistent inflation, advising investors to favor global bonds over long-term US Treasuries. He argued that the current market environment isn't the start of an easing cycle, but rather an adjustment or recalibration, with the Fed unlikely to accommodate the market with rate cuts.

Boivin noted that while inflation won't spiral out of control, the Fed has little room to lower rates below 4%. Since the Fed's mid-September rate cut, two-year, five-year, and ten-year Treasury yields have risen from around 3.5% to above 4%. Traders, based on strong economic data, have reduced the likelihood of significant rate cuts, anticipating a slightly more than percentage point cut to around 3.7% in the next 12 months. Several Fed officials have also expressed caution, planning to bring rates down to a neutral range around 3% next year.

However, President-elect Trump's proposed tax cuts, deregulation, and tariff policies could stimulate economic growth and inflation during his second term, further justifying the Fed's cautious stance. BlackRock Investment Institute's (BII) 2025 Global Outlook shows the department has reduced its holdings of long-term US Treasuries both tactically and strategically. Boivin explained the rationale: BII prefers holding US corporate bonds, UK gilts, and other bonds outside the US, as central banks in those regions have more room to ease in 2025.

Boivin specifically highlighted the risk of the US 10-year Treasury yield. He believes the 10-year yield is highly sensitive to surprises, and the market is reassessing long-term trends based on short-term data, amplifying volatility. Although the 10-year yield retreated after testing its post-election peak of 4.5% last month and has been trading around 4.2% this week, Boivin warned of the risk of any surge in long-term bond yields, not ruling out the possibility of the 10-year yield more sustainably approaching or remaining at 5%.

Beyond interest rate concerns, Boivin reiterated worries about the rapid growth of US debt and persistent deficits. He warned that the cost of servicing this debt will become a market issue. Although incoming Treasury Secretary Scott Besent has indicated a reduction of the budget deficit to 3% of GDP over the next few years, Boivin believes the deficit problem has been shelved, with no political support for austerity. He anticipates that the cost of debt servicing could trigger periodic premium adjustments, further impacting the bond market.

In its investment strategy for the coming year, BII also mentioned the value of Bitcoin as a diversifying asset. Particularly under a Trump presidency, Bitcoin's unique return drivers would lower its correlation with traditional risk assets. BlackRock's launch of its first spot Bitcoin ETF this year, accumulating nearly $50 billion in assets and becoming one of the most successful ETF launches in history, indirectly confirms BII's positive stance on digital assets.

Furthermore, BII noted that megatrends like artificial intelligence, increasing geopolitical fragmentation, aging populations, and the green energy transition are reshaping long-term trends, leading to a range of different outcomes. Investors should prioritize tactical viewpoints, reconsider portfolios such as traditional 60/40 strategies, and consider alternative investment options including private credit and infrastructure. Private market assets are expected to double to nearly $25 trillion by the end of the century, presenting new opportunities.

On the equity side, BII is more bullish on US equities, anticipating benefits from AI and expanding profit growth. It also favors Japanese equities, citing strong performance in corporate reforms and inflation driving pricing power.

In summary, BlackRock's view highlights the uncertainty of the current macroeconomic environment. High inflation, potential economic stimulus, and growing US debt present challenges for investors. In this climate, a cautious investment strategy, including diversification and a focus on the global bond market, is crucial. Investors need to closely monitor Fed policy and adjust their portfolios accordingly to navigate potential risks and opportunities. BlackRock's analysis provides valuable insights, but investors should conduct independent analysis and judgment to make investment decisions aligned with their risk tolerance. Long-term focus on megatrends such as AI, demographics, and the green energy transition will aid in long-term market success. Exploring alternative investments like private credit and infrastructure may also yield additional returns, though investors must be wary of the associated risks and conduct thorough due diligence. Ultimately, successful investing requires a combination of macroeconomic analysis, market trend judgment, and personal risk appetite to formulate a suitable investment strategy. Boivin's concern about US debt is also noteworthy, as high national debt could lead to higher long-term interest rates, impacting bond market investments. Investors should closely follow changes in US fiscal policy and assess their investment implications. In conclusion, BlackRock's analysis provides a comprehensive market outlook, yet investors must remain vigilant and develop personalized investment strategies.