BlackRock fund manager Tom Becker pointed out that the market is severely underestimating the potential risks of persistently high inflation in the United States and the United Kingdom. Based on this assessment, he has been gradually reducing holdings of both countries' government bonds. As a co-portfolio manager of the $4.1 billion BlackRock Tactical Opportunities Fund, Becker has been consistently increasing his short positions on long-term US and UK government bonds since the end of last year. He stated that this strategy stems from an analysis of sticky inflation—if price levels remain elevated, it will significantly constrain central banks' ability to cut interest rates, thereby pushing up long-term bond yields and limiting their price appreciation potential. He explicitly stated in an interview, "The bond market has performed remarkably well over the past few months, especially given the fragility of the inflation outlook reaching the 2% target. The current yield levels on government bonds are clearly too low."
This view starkly contrasts with the market's mainstream expectation—which generally believes price pressures will eventually ease, creating room for central banks to cut rates. Becker, however, argues that this optimistic view may be overlooking the persistent constraint that sticky inflation places on interest rate policy. Traders' current pricing reflects expectations for both the Federal Reserve and the Bank of England to cut rates by approximately 50 basis points each by the end of this year. Speculation that US President Donald Trump might appoint a new Fed Chair with a more dovish policy stance than Jerome Powell has also fueled bets on further rate cuts.
Nevertheless, BlackRock's management believes the market's expectation of 50 basis points in rate cuts this year from the Fed and the Bank of England is overly optimistic. They argue that current bond yields do not adequately compensate for the risk of persistently rising inflation. The firm's CEO, Larry Fink, alongside Becker, has warned that the market widely underestimates the stickiness of price pressures. They are closely monitoring whether the yield on the US 10-year Treasury note could breach the key psychological level of 5%, an event that would signal a potential new wave of inflationary shock and trigger a repricing of global equity markets.
Furthermore, BlackRock's decision-making also carefully considers macro-fiscal pressures, particularly the challenge the US faces in 2026 of refinancing approximately $10 trillion in government debt. The cost of restructuring such massive debt in a high-interest-rate environment is substantial, further diminishing the appeal of holding government bonds for the long term. Currently, the yield on the 10-year US Treasury is 4.2%, having edged up slightly from the over-one-year low hit in October. However, it remains well below the 4.8% level reached last January when initial tariff concerns under Trump sparked inflation worries.
Meanwhile, UK gilt yields have fallen sharply, approaching the over-one-year lows seen last November when the UK government announced its budget. Becker indicated that investors have yet to fully digest the fact that wage levels in the country are too high to easily bring inflation down to the Bank of England's 2% target. Becker added, "The UK's inflation challenge might not be over, even though the recent bond market rally creates an illusion that the worst is behind us."
It is worth noting that while reducing holdings of traditional safe-haven assets, BlackRock is strategically shifting its investment focus. The firm explicitly stated that during this period of heightened inflation expectation volatility, active management strategies hold an advantage over passive strategies that simply hold broad bond indices. Capital is flowing into areas they believe have greater growth potential, such as equity sectors driven by artificial intelligence (AI) technology, and certain emerging market debt offering attractive returns.
Comments