BlackRock: The era of high yields on US Treasuries will persist long-term, long-term government bonds have lost their hedging function against stock market declines.

BlackRock Investment Institute stated that due to the Iran war continuing to drive up inflation, government bond yields will maintain a higher level for a longer period of time. Strategists including Jean Boivin and Wei Li wrote in a report that inflation pressures were already brewing before the recent outbreak of conflict in the Middle East. The oil shock triggered by the war will only exacerbate these risks, putting more pressure on central banks to maintain tight monetary policies to curb prices. This is bad news for sovereign bonds, as inflation tends to erode the coupon on fixed-income bonds, weakening their real returns and reducing their attractiveness as a hedge against high-risk stocks. BlackRock chooses to maintain an "overweight" rating on U.S. and emerging market stocks, betting that the rapid expansion of AI will boost returns. The Iran conflict is prompting hawks to readjust their rate expectations. They wrote: "We believe high yields will persist in the long run, and long-term government bonds are no longer an effective diversification tool to protect against stock market declines." BlackRock made this statement as the rare "Super Central Bank Week" is underway - all members of the Group of Seven (G7) central banks will hold meetings this week to jointly decide on the monetary policies of the roughly half of the global economy. Although traders expect central banks to keep rates unchanged, they will closely watch officials' concerns about the inflation threats arising from the severe disruption in oil supply caused by the Iran conflict. Sovereign bond yields reflect these concerns. Since the start of the war, the U.S. 10-year Treasury yield has risen by about 40 basis points. The two-year Treasury yield, which is most sensitive to policy changes, has also risen in sync. Strategist Mark Cranfield said bond traders can see that major central banks are in a difficult position this week: they are trying to strike a balance between short-term inflation impacts from high energy prices and long-term risks from slowing economic growth. Meanwhile, global stock markets have regained lost ground due to the war, in part due to the resurgence of AI trading. BlackRock strategists wrote: "In this environment, we maintain a risk preference. This conflict is strengthening the resolve of governments around the world to invest in energy security and defense, which will increase heavy debt burdens and bring upward pressure on inflation." The institution's analysts stated that this is why they prefer stocks over bonds, and also point out that there are thematic investment opportunities in the electricity and infrastructure sectors driven by AI demand and energy security.