BlackRock has issued a warning that markets are severely underestimating the persistent risks of inflation in the United States and the United Kingdom. The global asset management giant believes that stubbornly high prices will hinder the pace of central bank interest rate cuts, asserting that current bond yield levels do not adequately reflect inflation risks.
According to a report, Tom Becker, co-portfolio manager of BlackRock's $4.1 billion BlackRock Tactical Opportunities Fund, stated that the fund has been selling US and UK government bonds since the end of last year. Anticipating that inflationary pressures will be difficult to subside, Becker has also increased short positions against long-dated US Treasuries and UK government bonds.
This investment strategy runs counter to the prevailing market expectations. Traders are currently pricing in approximately 50 basis points of interest rate cuts from both the Federal Reserve and the Bank of England by the end of this year. Becker's positioning indicates his conviction that inflation will remain elevated, which would directly obstruct the path of central bank easing policies.
In an interview, Becker pointed out that, considering the still-turbulent prospects for inflation falling back to 2%, bond performance over the past few months has been excessively strong. He stated bluntly: "Government bond yield levels are a bit too low."
The current market consensus is built on the expectation that prices will eventually fall, thereby clearing the path for rate cuts. Beyond pricing in roughly 50 basis points of policy easing from central banks, political factors are also influencing market sentiment. Speculation that Donald Trump might appoint a new Fed Chair with a more dovish policy inclination than Jerome Powell has further fueled investor bets on additional rate cuts.
However, Becker's short-selling activities highlight a divergence between institutional investors and the mainstream market view, suggesting that markets may be overly optimistic about the path of disinflation.
Looking at market data, the yield on the 10-year US Treasury note is currently around 4.2%. Although this figure has slightly recovered from the one-year low hit last October, it remains significantly below the peak of 4.8% touched last January. At that time, concerns that Trump's tariff policies could ignite inflation had temporarily pushed yields higher. Becker believes that, given the current inflation outlook, the existing yield levels are not sufficiently attractive.
In the UK market, government bond yields have fallen sharply since the government's budget announcement last November and are currently trading near their lowest levels in over a year. Becker warned that investors are overlooking a key fundamental factor: UK wage levels are too high to easily pull inflation back to the Bank of England's 2% target.
"The UK's inflation challenge may not be as finished as the recent rally suggests," Becker added, implying that market optimism towards UK bonds might be premature.
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