BlackRock sees European fixed income benefiting from any investor shift away from the US, signaling caution around unpredictable US policy and ballooning government debt.
Foreign investors are stepping back from the US and its “special status” in financial markets could be challenged if the country’s government debt is left unchecked, according to BlackRock’s fixed income outlook.
The largest US fixed-income allocators are risk averse and see Europe’s stability as more appealing compared with Asian or emerging markets, the report said.
“It’s a backdrop of less predictable policy making in the US compared to the predictable nature of Europe and where it’s going,” said James Turner, co-head of European fundamental fixed income investment at BlackRock.
“It has made people assess their allocations between Europe and the US.”
With the US government issuing more than half a trillion dollars of debt weekly and international investors moving money elsewhere, the risk of borrowing costs increasing further is tangible, according to the report.
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Meanwhile, increased debt sales from European governments, stemming in part from the German government’s defense and infrastructure packages, will increase liquidity in the region’s bond market, the report said.
The shift away from the US has yet to materialise in the data, with overseas investors in April buying the most US corporate bonds in six months.
Citigroup strategists point to the depth and diversity of the market, which has more than double the amount of high-grade corporate bonds outstanding compared with euro-denominated debt.
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Still, German bunds have outperformed US treasuries since April after the chaotic rollout of tariffs took some shine off US government debt’s safe-haven status.
BlackRock aims to have a liquid portfolio and invest in bonds that have widened to attractive levels during volatile periods.
“The way you do that is make sure that you can stay nimble and you have the ability to move the portfolios quickly,” Turner said.
