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BlackRock (BLK) cut US stocks to neutral and moved to overweight Treasurys for the first time in about six years as yields neared 5.25%, citing AI volatility.
- BlackRock cut US equities to neutral from overweight and raised short-dated Treasurys to overweight.
- The 10-year Treasury yield is up about 110 basis points this year, to roughly 5.25%.
- Markets price 160 basis points of added Fed tightening; BlackRock calls that excessive.
Lead
BlackRock's research arm, the BlackRock Investment Institute, downgraded US equities to neutral from overweight on October 12. It also ended an underweight on US government debt that had been a portfolio mainstay for most of the past six years. The shift moves the world's largest asset manager from favoring stocks to favoring the front end of the Treasury curve. The stated reason is a rise in interest rates that has made government bonds more competitive with equities.
What Did BlackRock Change?
BlackRock lowered US stocks to neutral, raised short-dated Treasurys to overweight and moved long-dated Treasurys to neutral from underweight. It also trimmed its underweight on Japanese government bonds and cut mortgage-backed securities to neutral.
The firm described the equity move as short-term risk management, not a break with its AI thesis. It still prefers AI-linked equities, listed infrastructure and emerging markets. The reason for caution is what it called volatility around the AI buildout. Rising capital spending and financing needs tied to data centers and related infrastructure are adding to near-term swings in US shares.
Why Are Rising Yields Driving the Shift?
Higher real yields, not inflation expectations, are the main driver. The 10-year Treasury yield has climbed about 110 basis points this year to roughly 5.25%. The increase reflects intensifying competition for capital, tensions in the Middle East and higher oil prices.
Markets now price about 160 basis points of additional federal reserve tightening over the next 12 months. BlackRock regards that as overdone, which is why it favors the short end of the curve. Short-dated notes lock in elevated yields while limiting exposure to further moves in long-term rates.
BlackRock estimates that Treasurys have a cushion of about 75 basis points. Yields could rise by that much over the next 12 months before total returns turn negative. That buffer supports the case for owning bonds as a source of income after years of low payouts.
How Did Markets React?
US stocks were little changed on October 13 and Treasury yields eased. The S&P 500 slipped 0.02% to 7,805.45. The Dow Jones Industrial Average fell 0.35% to 51,670.10, and the Nasdaq Composite lost 0.15% to 27,204.38. Bank earnings were mixed, and a steep overnight drop in South Korea weighed on memory chip names.
The 10-year yield fell more than 5 basis points to about 5.19% as oil prices declined. That left it just below the level cited in BlackRock's call. The muted equity reaction suggests the downgrade is a shift in positioning rather than a signal of an imminent selloff. The benchmark index remains near record territory.
How to Buy Treasury Bonds as Yields Climb?
Individual investors can buy Treasury bonds directly at auction through the government's TreasuryDirect platform or through a brokerage account on the secondary market. Treasury bills, notes and bonds differ by maturity. Bills run up to one year and notes from two to ten years. Bonds mature in 20 or 30 years.
BlackRock's preference for short-dated paper reflects that the front end offers high income with less sensitivity to further rate swings. Longer-dated bonds carry greater price risk if yields keep rising.
What Does This Mean for the Fed and the AI Trade?
The call turns on how the federal reserve responds to inflation and oil. Upcoming consumer and producer price reports are the next test of whether rate expectations ease or yields spike again. A softer reading would support BlackRock's view that hike pricing is excessive. A hot reading would extend the climb in yields and add pressure on equity valuations, especially for AI-linked companies that depend on external financing.
The structural AI case is not in dispute. The question is price and pace. Capital spending on chips, power and data centers continues to rise, and funding that spending competes with a risk-free yield above 5%. As Treasury yields rise, the hurdle rate for growth stocks rises with them.
Outlook
BlackRock's pivot is a tactical one. It trims equity risk without abandoning AI, and it uses a yield above 5% to add bond exposure for the first time in about six years. The next inflation data and the path of oil prices will decide whether yields stabilize near current levels or push higher, and with them the case for the move.
