BlackRock Warns That Stubborn Inflation Could Hammer Price Of Long-Term Bond
AInvestFriday, Mar 22, 2024 4:43 am ET
2min read
BLK --

Recently, a portfolio manager at BlackRock, the world's largest asset management firm, stated that long-term U.S. Treasuries could be impacted if the Federal Reserve's prospects for rate cuts are challenged by stubborn inflation.

This week, most Federal Reserve officials continued their previous forecasts—that despite stronger-than-expected economic growth, the Fed would still cut rates three times this year.

However, BlackRock's Fixed Income Portfolio Manager David Rogal expressed in an interview that if inflation remains persistently strong, the prices of medium to long-term U.S. bonds could be affected, as they have not yet fully reflected the scenario in which the Fed may be forced to maintain higher interest rates for a longer period.

Rogal pointed out, With all the heavy supply and a pretty robust economy, we don't have any term premium in the curve, referring to the premium investors require to take on the risk of holding long-dated notes. For extending duration out that far on the curve, there should be more compensation.

Rogal also mentioned that even though Federal Reserve officials still expect three rate cuts this year, they concurrently forecast a narrower margin for rate cuts over the next two years.

He said, It was interesting to me that their inflation forecast rose for 2024 but the policy rate expectation didn't change. I think that just reflects the fact that the Fed has a bit of inertia on its dovish pivot, and I think if we get more bad data on inflation, they will have to adjust.

In the Federal Reserve's latest Summary of Economic Projections (SEP) released on Wednesday local time, the Fed raised its forecasts for this year's core inflation and economic growth rate. The current economic projection anticipates core PCE growth rates at the end of 2024 and 2025 to be 2.6% and 2.2%, respectively (compared to December's expectations of 2.4% and 2.2%); real GDP growth rates for 2024 and 2025 are expected to be 2.1% and 2.0%, respectively (compared to December's expectations of 1.4% and 1.8%).

Interestingly, BlackRock Vice Chairman Philipp Hildebrand also stated on Thursday that the Fed's policy actually implies an acceptance of a higher neutral interest rate, as inflation remains sticky amid ongoing supply constraints.

He believes that the Fed's forecasts imply a kind of internal consensus among officials, that in the long term, the path of inflation and the path of interest rates will be sticky. We're going to likely see a higher neutral rate level. The inflation numbers were slightly adjusted upwards for the next two years to come. That is going to be the real story here.

In terms of the bond market, U.S. Treasury yields of various maturities closed mixed on Thursday. The 2-year U.S. Treasury yield rose 3.6 basis points to 4.645%, the 5-year yield increased 1.3 basis points to 4.26%, the 10-year yield was flat at 4.274%, and the 30-year yield fell 1.5 basis points to 4.44%.

A series of strong U.S. economic data released on Thursday curbed the post-Fed decision decline in Treasury yields.

Among the data, the March S&P Global Manufacturing PMI for the U.S. rose to 52.5 in early March from 52.2 in February; the U.S. Department of Labor reported an unexpected decline in initial jobless claims last week, indicating that job growth remained robust in March; the National Association of Realtors (NAR) also reported that U.S. existing home sales in February reached their highest point in a year.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.