From a client note warning that while:
- Markets seem primed to equate higher rates as being negative for equities. We’ve seen this before and don’t agree.
- Policymakers and markets may misread the unique mix of the restart, a mutating virus, supply-driven inflation and new central bank policies.
BlackRock outline thierbase case:
- Central banks take their foot off the gas pedal to move away from emergency stimulus.
- We expect them to live with inflation, rather than hit the brakes by raising rates to restrictive levels.
And go on:
The Fed has signaled three rate rises this year – more than we expected. Markets seem primed to equate higher rates as being negative for equities. We’ve seen this before and don’t agree. What really matters is that the Fed has kept signaling a low sum total of rate hikes, and that didn’t change last week. This historically muted response to inflation should keep real policy rates low, in our view, supporting equities.
And not all spikes in longterm yields are the same. Last week’s jump in U.S. Treasury yields was about the Fed signaling a readiness to start shrinking its balance sheet. This could result in a return of the term premium that investors typically demand for the risk of holding long-term bonds. This is not necessarily negative for risk assets as it can reflect an investor preference for equities over government bonds.
BlackRock's bottom line:
- We prefer equities and would use COVID-related selloffs to add to risk. We are underweight developed market government bonds – we see yields gradually heading higher but staying historically low.
