BlackRock is sticking with its longstanding underweight on long-term US Treasuries, citing structural concerns over debt sustainability and changing market expectations around risk.
This year US treasuries have been hit by heightened volatility driven by fiscal policy shifts and investor concerns over the nation's financial trajectory.
US president Donald Trump’s ‘One Big Beautiful Bill Act’, which includes significant tax reductions, has raised concerns about the potential for increased deficits. Analysts warn that such fiscal measures could exacerbate the national debt, which stood at $36.56trn as of March 2025
In its latest note, the BlackRock Investment Institute warned that the recent surge in US yields reflects deeper shifts in investor sentiment that are unlikely to reverse soon.
Michel Dilmanian, portfolio strategist at the institute, said: “We see this as a return to past norms and keep our long-held underweight.”
Since its low in early April, the yield on the 10-year US treasury has climbed roughly 50 basis points, reaching around 4.4%. BlackRock attributes this rise to a re-evaluation of the risks associated with long-duration government debt, especially in the US, where deficit spending remains elevated.
“Long-term US treasury yields are up sharply from April lows as policy shifts, like the budget bill, draw attention to US debt sustainability,” Dilmanian said.
Investor expectations have adjusted accordingly. During the pandemic, many were willing to accept minimal compensation for holding long-term government bonds, trusting in the perceived safety of US sovereign debt, but that sentiment appears to be reversing.
“Investors now want more compensation for the risk of holding long-term bonds,” the portfolio strategist said.
BlackRock had previously estimated that the US deficit-to-GDP ratio would likely fall within the 5% to 7% range. However, new spending plans embedded in recent US legislation and a broader recalibration of fiscal assumptions have increased the likelihood that deficits could exceed even this wide band.
This trend, coupled with last year’s downgrade of the US sovereign rating by Moody’s, is fuelling a rise in term premiums. Term premium refers to the additional yield investors demand for holding longer-dated bonds, reflecting both inflation uncertainty and perceived fiscal instability.
“Our strongest conviction has been staying underweight long-term US treasuries. We maintain that view as concerns about the deficit mount,” Dilmanian said. “We’re still underweight long-term developed market (DM) government bonds but have a relative preference for the euro area and Japan over the US.”
The upward movement in US yields is not occurring in isolation. Bond markets globally are adjusting, with notable shifts in Japan, the UK, and across the eurozone.
In Japan, the yield on 30-year government bonds reached a record high in May. The move followed the Bank of Japan’s decision to reduce bond purchases and came amid poor auction demand.
Similarly, in the UK the government has scaled back long-term bond issuance citing weak demand and rising costs.
In the eurozone, higher yields are also emerging but for different reasons. Increased spending on defence and infrastructure is expanding fiscal outlays, contributing to the rise in sovereign bond yields.
“Yet we prefer euro area government bonds to the US. They’re increasingly less correlated to fluctuations in US treasuries and a sluggish economy gives the European Central Bank more room to cut rates in the near term,” Dilmanian explained.
BlackRock’s underweight in US treasuries is balanced by an overweight in short-duration fixed income, as well as selected exposure to eurozone credit and sovereigns.
Despite the long-term bond underweight, BlackRock remains constructive on US equities.
“We flipped back to being pro-risk in April once it became clear that hard economic rules limit how far US policy can move from the status quo, such as how foreign investors fund US debt,” the portfolio strategist said.
“Our US equity overweight relies on that rule, just as another rule – supply chains can’t rewire overnight without serious disruption – proved binding on trade policy. This overweight is grounded in the artificial intelligence mega force – reinforced by Nvidia’s earnings beat last week.”