BlackRock Sees Higher Government Bond Yields as a Long-Term Trend

Government Bond Yields Expected to Remain Elevated as Iran War Continues

The Iran war is set to keep inflation elevated, leading the BlackRock Investment Institute to predict that government bond yields will remain higher for longer. According to a report by the firm, inflation pressures were already building before the latest conflict in the Middle East, and the oil shock from the war will only exacerbate these risks.

Inflationary Pressures Compound Central Banks' Challenges

Strategists at BlackRock, including Jean Boivin and Wei Li, wrote in the report that the oil shock from the war will pile pressure on central banks to keep monetary policy tight to rein in prices. This is bad news for sovereign bonds, as inflation tends to erode their real returns and dent their appeal as a hedge against riskier equities.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

BlackRock's Views Amidst Rare G7 Central Bank Convening

BlackRock's views come during a rare week where every Group of Seven central bank convenes, together deciding monetary policy for about half the world's economy. While traders expect them to leave interest rates unchanged, they will be alert to signs officials are worried about the inflation threat posed by the Iran conflict.

Sovereign Bond Yields Reflect Concerns

US 10-year Treasury yields have risen about 40 basis points since the start of the war. Those on two-year paper, among the most sensitive to changes in policy, have risen in tandem.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Equities and the AI Trade

Global equities have erased their war-driven losses partly due to the return of the artificial intelligence trade. BlackRock strategists believe the conflict is reinforcing the resolve of governments around the world to invest in energy security and defense, adding to towering debt loads and putting upward pressure on inflation.

BlackRock's Preferred Investment Strategy

The firm prefers stocks over bonds, citing thematic opportunities in power and infrastructure driven by AI demand and the push for energy security. "We stay risk-on in this environment," the strategists wrote.