The global financial markets, on Monday, witnessed a surge in long-term government yields across Europe and the Americas. BlackRock Inc (NYSE:BLK)., the world's leading asset manager, suggested that the benchmark 10-year Treasury yield, which recently reached a 16-year high of over 4.5%, could potentially climb even higher. This expectation aligns with the wider market sentiment that anticipates sustained high rates amidst a turbulent macroeconomic climate marked by uncertainty around central bank policies and forthcoming risks.
On Monday, the benchmark 10-year Treasury saw a significant leap of up to 9.4 basis points, reaching an intraday peak of 4.53%. Despite slightly falling to around 4.51%, it is still heading towards its highest closing point since October 17, 2007. The 10-year rate is following the course set by the Federal Reserve's primary interest rate target, reverting to levels common during and prior to the early 2000s.
Investors are adjusting to the message from the Federal Reserve and other central banks that interest rates will remain high for an extended period. The Swiss National Bank continues its fight against inflation, closely observing inflation pressures. Similarly, the Bank of England kept its main policy rate at 5.25% last week, encouraging markets to accept the prolonged high-rate theme. Likewise, Christine Lagarde, President of the European Central Bank, assured European Parliament lawmakers on Monday that borrowing costs would be maintained at elevated levels as necessary.
Jean Boivin, head of the BlackRock Investment Institute, and his team released a note on Monday stating that markets are aligning with their view that rates will remain high. They noted that rates in Europe are exceeding their predictions. The note suggests a tactical approach for the next six to twelve months to maintain an underweight position on U.S. and European equities.
BlackRock has been underweight on long-term U.S. Treasuries for an extended period, a position that has proven beneficial as yields rise. They favor short-term Treasuries, which offer comparable income to high-quality credit without the same credit or interest rate risk. The company has refrained from endorsing investors who have shown enthusiasm for long-dated Treasurys, lured by the highest yields in over a decade.
The continued yield increase on Monday had a significant impact on the financial market. The three major U.S. stock indexes struggled to gain momentum following a lower opening, while the ICE (NYSE:ICE) U.S. Dollar Index rose by 0.4%.
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