BlackRock Raises Credit Outlook To 'Modestly Overweight'

BlackRock, Inc. BLK’s Investment Institute (BII) raised its credit outlook to “modestly overweight” and cited a preference for credit over equities in its weekly commentary.

“Developed market central bank actions should pave the way for lower volatility in interest rates, providing a stable environment for credit spreads to narrow,” BII head Jean Boivin wrote in the report released Tuesday.

“The risk of temporary liquidity crunches remains. Yet valuations have cheapened and coupon income is crucial in a world starved for yield.”

Boivin also cited expectations for higher corporate credit defaults and downgrades.

“Yet over a five-year horizon the sizeable widening in credit spreads that we’ve seen should compensate for increased losses due to defaults and downgrades, driving up expected returns for credit, in our view,” he wrote.

Government Bonds

The BII projected five years of negative government bond returns across developed markets and predicted a gradual rebound in yields as government policy constricts rates.

“This diminishes the strategic case for holding nominal government bonds,” Boivin wrote.

The firm favors Treasury Inflation-Protected Securities over discount margin government bonds, although it maintains a Neutral rating on TIPS for the next six to 12 months.

It is keeping an eye on Chinese government bonds while staying sidelined on global government bonds in general.

“They act as ballast against risk-off episodes,” Boivin wrote of government bonds. “Additional easing by major central banks has become more likely, in our view. We favor U.S. Treasuries over government bonds in other regions, but see risks of a diminishing buffer against equity market selloffs and a snap-back in yields from historically low levels.”

Cash And Equities

The firm maintains Neutral ratings on both cash and global equities.

“We are also tactically overweight U.S. equities for their relative quality bias and the strong policy response to date, and underweight euro area and Japanese equities for the limited policy space to safeguard the economy against the virus shock,” Boivin wrote.

BlackRock’s predictions reflect higher inflation risk related to fiscal and monetary policy as well as deglobalization.