BlackRock adds short positions in US and UK bonds: Inflation risk is underestimated, and the yield on the 10-year US Treasury may rise by another 5%.

BlackRock fund manager Tom Becker pointed out that the current market severely undervalues the potential risks of sustained high inflation in the United States and the United Kingdom. Based on this judgment, he has gradually reduced his holdings of government bonds in both countries. As co-head of the $4.1 billion BlackRock Tactical Opportunities Fund, Becker has been steadily increasing his short positions in long-term US and UK government bonds since the end of last year. He stated that this strategy is based on an assessment of inflation stickiness - if price levels continue to run at high levels, it will significantly restrict central bank rate cuts, thereby pushing up long-term bond yields and compressing their upside potential. He explicitly stated in the interview: "The bond market has performed well in the past few months, especially with the inflation outlook slightly weak in achieving the 2% target. The current government bond yield levels are significantly low." This view contrasts sharply with the mainstream market expectations - the market generally believes that price pressures will eventually ease, creating policy space for central bank rate cuts, while he believes that this optimistic expectation may overlook the persistent constraining effect of inflation stickiness on interest rate policy. Traders are currently pricing in expectations that the Federal Reserve and the Bank of England will each cut interest rates by about 50 basis points by the end of this year. Speculation about President Donald Trump appointing a new Fed chair with a more dovish policy stance than Jerome Powell has also fueled bets on further rate cuts. However, BlackRock management believes that the market's expectations for a 50 basis point rate cut by the Federal Reserve and the Bank of England this year are overly optimistic, and current bond yields do not adequately compensate for the ongoing upward inflation risks. BlackRock CEO Larry Fink and Becker warned that the market widely underestimates the stickiness of price pressures. They are closely monitoring whether US 10-year Treasury yields will surpass the key psychological threshold of 5%. If this happens, it would mean a new wave of inflation shock may be coming, leading to a repricing of global stock markets. In addition, BlackRock's decision-making also carefully considers macro fiscal pressures, especially the looming challenge of refinancing approximately $10 trillion of US debt in 2026. Restructuring massive debt in a high-interest rate environment comes at a huge cost, further weakening the attractiveness of holding government bonds long term. Currently, the yield on the 10-year US Treasury bonds is 4.2%, slightly up from the over one-year low set in October. However, it is still far below the 4.8% level reached in January last year when Trump's tariffs initially sparked inflation concerns. Meanwhile, UK bond yields have dropped significantly, approaching the over one-year low set when the UK government announced the budget in November last year. Becker stated that investors have not fully digested the fact that the country faces challenges in lowering inflation to the Bank of England's 2% target due to high wage levels. Becker added, "The inflation challenge in the UK may not be over yet, although the recent rebound in the bond market may give the illusion that inflation has passed a difficult period." It is worth mentioning that while reducing traditional safe-haven assets, BlackRock is shifting its investment focus strategically. The institution has explicitly stated that in times of increased fluctuations in inflation expectations, active management strategies have an advantage over passive strategies holding broad bond indices. Funds are flowing into sectors they believe have more growth potential, such as stocks being driven by artificial intelligence (AI) technology and certain emerging market debt offerings with attractive returns.