BlackRock: Bullish on short-term government bonds and credit bonds, maintaining overweight on Japanese stocks

According to the Zhitong Finance APP, on August 7th, BlackRock stated that more central banks around the world are beginning to take interest rate cuts, but this does not mean that the world is entering a typical monetary easing cycle. Due to reduced summer trading activities, the market may overreact to data fluctuations. Short-term bullish on government bonds and credit bonds, considering the current market reaction, the Bank of Japan will adjust its hawkish policy and maintain an overweight view on Japanese stocks.

In the long run, BlackRock believes that long-term bond yields will eventually rise as investors demand higher term premiums or more risk compensation for holding long-term bonds. However, obtaining term premiums takes time, and since yields will fluctuate significantly with changes in policy expectations, a neutral view on long-term government bonds is maintained at a tactical level. The decline in bond yields last week was due to high market expectations for the extent of the Fed rate cut and excessive concerns about a US economic recession. The US labor market remains resilient: while job growth has slowed, it remains strong, the employment rate continues to rise, and the number of job cuts by companies has not increased. Even though recent US inflation data has fluctuated, sustained wage pressures and a shrinking labor force will lead to long-term inflation in the service sector. In addition, the massive future US fiscal deficit will keep interest rates at a neutral level (neither stimulating nor inhibiting economic growth), and higher than pre-pandemic levels.

BlackRock stated that factors catalyzing term premiums may emerge, but the timing is uncertain. One factor is the US presidential election, which may shift market focus to fiscal prospects. The US Treasury's bond issuance plan currently does not require major adjustments. However, BlackRock expects that to match the pace of government spending, the net issuance of bonds will eventually increase significantly. If the market struggles to absorb these bond issuances, term premiums may increase as a result. Another catalyzing factor is the Fed's adjustment of the size of its balance sheet or the duration of bond holdings. The Fed remains a significant buyer of long-term bonds and bought approximately 10% of 10-year and 30-year bonds in 2023, holding about 30% of outstanding bonds with maturities of 10 years or more. The composition of buyers is also worth noting: while the purchasing volume of foreign buyers has decreased, more and more American households are entering the market.

Furthermore, BlackRock believes that the policy adjustments by the Bank of Japan will also affect the term premiums of global bonds. If the Bank of Japan takes a more proactive stance against inflation risks, it may push up bond yields, prompting domestic Japanese investors to prefer domestic bonds over foreign bonds from the US, Eurozone, and other countries.

In response to the recent severe volatility in global markets, a survey of professional investors in the Asia-Pacific region by BlackRock showed that in the face of the current global sell-off of risk assets, 94% of investors stated that they would take the opportunity to buy or continue to hold and observe changes in the market