By Davide Barbuscia
NEW YORK (Reuters) – The BlackRock Investment Institute said on Monday it was cautious about long-term U.S. Treasury bonds ahead of November’s presidential election, as investors are likely to demand more compensation to hold them amid large budget deficits.
“We remain overweight on US equities ahead of the US election, but are cautious on long-term US government bonds. Whoever wins, budget deficits will remain large,” the institute, part of top asset manager BlackRock, said in a note.
Neither President Joe Biden nor Republican challenger Donald Trump “is charting a path to sustainable deficit reduction,” the institute said. Large deficits will keep inflation high, meaning interest rates will likely remain high for a long time.
“We think this, and markets having to absorb large bond issuances, will prompt investors to demand more term premiums, or compensation for the risk of holding long-term U.S. bonds,” the report said.
The institute maintains an ‘overweight’ recommendation on short-dated US Treasuries, saying it favors them in a high interest rate environment, and remains neutral on longer-dated US Treasuries.
With no end in sight to large budget deficits, some investors have begun to allocate their resources to avoid losses if government bond yields, which move inversely to prices, rise due to demand imbalances. offer.
This week, the Treasury Department will sell nearly $120 billion in bonds with maturities of three, 10 and 30 years.
Demand for each auction will be closely watched because of the turmoil surrounding the sustainability of U.S. debt, said Jimmy Chang, chief investment officer at Rockefeller Global Family Office.
He expects a return of so-called bond vigilantes, investors who punish profligate governments by selling their bonds, but says the timing is uncertain.
“Politicians don’t win elections or re-elections on the promise of austerity… Ultimately, I think the outcome will be the market disciplining Washington,” he said.
(Reporting by Davide Barbuscia; Editing by Susan Fenton)
