BlackRock Warns the Worst US Bond Rout in History is Far From Over

The US bond market is in the throes of an unprecedented three-year rout – and the selloff has room to run further, according to the world's biggest asset manager.

Benchmark 10-year yields have already more than quintupled since the end of 2020 as the market reeled from the impact of decades-high inflation, a steep surge in interest rates, and fears of a sovereign debt crisis.

The rise in yields accelerated in recent weeks, spooking traders across asset classes after The Federal Reserve last month signaled rates will remain higher for longer as inflation risks linger. The central bank has boosted key rates by more than 500 basis points since early 2022 – the steepest increase since the 1980s – to rein in consumer price pressures.

In the fourth-quarter update to its investment outlook, BlackRock said it will avoid investing in long-term US bonds as it expects yields to continue their climb. Yields rise when bond prices fall.

"We still steer clear of long-term U.S. bonds even after their surge. Why? We think term premium – the compensation investors demand for the risk of holding long-term bonds – will rise further, pushing yields higher, as markets price in persistent inflation, higher-for-longer rates and high debt loads," investment experts at the asset-management giant, led by Philipp Hildebrand, wrote in the report.

The iShares' 20+ Year Treasury ETF, which tracks longer-duration US government bond prices, has tumbled a whopping 46% since the end of 2020. During the same period, 10-year Treasury yields have jumped to 4.72% from 0.92%.

Biggest bond selloff ever

The ongoing Treasury rout ranks as the deepest bond bear market in the 247-year history of the US, according to Bank of America strategists led by Michael Hartnett.

Persistent inflation pressures will boost 10-year Treasury yields to 5%, a level last seen in mid-2007, strategists at ING wrote in a note last week. The annual inflation rate in the US edged higher to 3.7% in August, from a two-year low of 3% reached in June.

A surge in the supply of bonds is also weighing on prices. US government debt climbed past an unprecedented $33 trillion last month, doubling in the past decade.

And that's got several experts concerned. Billionaire investor Ray Dalio cautioned in June that the US is at the start of a "classic late, big-cycle debt crisis" characterized by a shortage of buyers for its bills and bonds. Veteran economist Nouriel Roubini has also expressed similar concerns.

BlackRock still prefers short-dated US bonds, given their high yields and relatively low risk. Two-year Treasuries currently pay around 4.95%.