Jean Boivin, head of the BlackRock Investment Institute, has advised investors to consider global bonds over long-term U.S. Treasuries. He predicts that ongoing inflation may lead the Federal Reserve to adopt a more passive stance in the near future. In a recent interview at BlackRock's New York office, Boivin stated, "We do not anticipate inflation to spiral out of control; however, it will not be conducive to rate cuts.
This is not the initiation of an easing cycle but rather a recalibration." Since the Federal Reserve began its rate cuts in mid-September, yields on two-year, five-year, and ten-year U.S. Treasuries have increased from about 3.5% to above 4%. Strong economic indicators have led traders to lower expectations of significant rate cuts, with the anticipated cut over the next year being around 3.7%.
Boivin believes that "the Federal Reserve lacks substantial capacity to reduce rates below 4%." Recently, several Federal Reserve officials voiced a cautious outlook on reducing rates to a neutral range of approximately 3% in the following year. In parallel, proposed tax reductions, deregulation, and tariff initiatives by President-elect Trump may boost economic growth and inflation during his forthcoming term.
BlackRock's research department released its global outlook for 2025, emphasizing a preference for reducing long-term U.S. Treasuries at both tactical and strategic levels. Boivin highlighted BlackRock's inclination towards holding U.S. corporate bonds, UK government bonds, and other international bonds, as central banks in these areas possess more flexibility for easing measures in 2025.
He reiterated concerns regarding the rapid escalation of U.S. debt and persistent deficits, cautioning that even if nominated Treasury Secretary Scott Bessent aims to lower the budget deficit to 3% of GDP in the coming years, the repayment costs will present a market concern. "The deficit issue has been sidelined, with no advocates for tightening policies," he remarked.
Boivin warned about the risks associated with a potential spike in long-term bond yields. He did not dismiss the chance of ten-year bond yields "sustainably approaching 5% or being perceived as habitually remaining at that level," which would disrupt the U.S.'s "budgetary arithmetic" and lead investors to seek higher returns for holding Treasuries.
He also noted, "There is a strong desire to revert to a low-interest-rate environment, which may prompt questions about debt repayment costs and could induce periodic premium adjustments.".