June 21, 2024

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BlackRock says investors set to face 5.5% long-term borrowing costs

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The world’s largest asset manager sees benchmark US borrowing costs hovering around 5.5 per cent for the next five years as investors grapple with inflationary pressures.

Ten-year yields are at 4.5 per cent, but Jean Boivin, head of the BlackRock Investment Institute and a former deputy governor of the Bank of Canada, said markets were heading for much higher long-term borrowing costs. These would come from ageing populations, fractious geopolitics and costs associated with the energy transition, he said.

“We think 5.5 per cent long-term 10-year yields in the US is the level that seems consistent with the macro backdrop in the next five years,” Boivin told the Financial Times. “It’s also consistent with the compensation for risks that bond investors should require to invest in long-term bonds.”

The comments follow a sharp rally in government bonds on both sides of the Atlantic in recent days as conviction has grown that central banks have reached the end of their interest rate raising cycles.

Ten-year US Treasury yields dropped by 0.35 percentage points this week. Wednesday’s fall was the biggest daily decline since the collapse of Silicon Valley Bank in March, following what investors saw as dovish remarks by US Federal Reserve chair Jay Powell. They sunk by almost as much again on Friday after softer than expected US payrolls data.

Powell said the Fed was committed to achieving a policy stance that was “sufficiently restrictive to bring down inflation to 2 per cent”.

But BlackRock’s Boivin expressed doubts about the US central bank’s chances of succeeding. “We see inflation on a rollercoaster: falling now but then starting to unsettle some time after next year,” he said, adding that he expected to see inflation “closer to 3 per cent in the US over the next couple of years”.

The headline US inflation rate has fallen from…

2023-11-03 09:53:05

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