BlackRock looks to UK for government bond allocations
BlackRock has moved overweight on developed market (DM) government bonds for the first time in five years.
In an asset allocation update from the BlackRock Investment Institute (BII), the investment team flagged the move it has made in government bonds over holding investment grade credit.
In terms of maturity, BII said it prefers short-dated maturities over long ones across DMs as there is more uncertainty, volatile inflation and heightened bond market volatility at present.
“We’re in a new, more volatile regime where macro risks are elevated and valuations are shifting more quickly. Assessing valuations on a strategic horizon of five years and longer is key for long-term investors, even if short-term performance can be driven by other factors.
“DM government bonds are another area where we find opportunities – notably in short-dated DM and long-dated DM bonds excluding the US.
“We’re now overweight DM government bonds overall on a strategic horizon for the first time in five years.”
It particularly favours UK gilts and eschews US Treasuries as it expects policy rate to fall more in the UK than in the US, which makes UK government bond yields more attractive than other DMs.
The Bank of England has set interest rate at 5.25 per cent which has been held in place since August 2023. But inflation is at 2.3 per cent, lower than in Australia and within the BOE’s 2–3 per cent target, so there are expectations that a rate cut could come as early as June.
“Gilt yields have compressed relative to US Treasuries, markets are pricing in Bank of England policy rates closer to our expectations.”
On the other hand, the BII is underweight on investment grade credit and on Japanese government bonds – the only two areas out of 14 fixed income assets where it holds an underweight.
“Tight spreads don’t compensate for the expected hit to corporate balance sheets from rate hikes, in our view.”
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Laura Dew
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