BlackRock sells U.S. and U.K. government bonds due to concerns about an inflation rebound.

BlackRock has warned that the market is currently seriously underestimating the persistent risks of inflation in the US and UK. The global asset management giant believes that stubbornly high prices will hinder the pace of central bank rate cuts, and the current level of bond yields does not match inflation risks.

According to media reports on the 23rd, Tom Becker, co-manager of BlackRock Tactical Opportunities Fund, which manages $4.1 billion, said the fund has been selling US and UK government bonds since the end of last year. Expecting inflationary pressures to persist, Becker has also increased short positions on long-term US Treasuries and UK gilts.

This investment strategy runs counter to prevailing market expectations. At present, traders are pricing in about 50 basis points of rate cuts from both the Federal Reserve and the Bank of England by the end of this year. Becker’s holdings indicate he is convinced inflation will remain high, which will directly obstruct the central banks’ path of policy easing.

In a media interview, Becker pointed out that given the still volatile outlook for inflation returning to 2%, bonds have performed too strongly over the past few months. He stated outright:

"The yield levels on government bonds are a bit too low."

The Tug-of-war Between Rate Cut Expectations and Inflation Realities

The current market consensus is based on expectations that prices will eventually recede, thereby clearing the way for rate cuts. In addition to pricing in about 50 basis points of policy easing from central banks, political factors are also affecting market sentiment. Market speculation is that Donald Trump may nominate a new Federal Reserve chair who is more dovish than Powell, further fueling investors’ bets on additional rate cuts.

However, Becker’s short positions highlight the divergence between institutional investors and mainstream market views, namely that the market may be too optimistic about the path of declining inflation.

From market data, the yield on 10-year US Treasuries is currently around 4.2%. Although this has recovered slightly from the one-year low hit last October, it remains well below the 4.8% high reached in January last year. Back then, concerns that Trump’s tariff policies might trigger inflation briefly pushed yields higher. Becker believes that, given the current inflation outlook, existing yield levels are not attractive enough.

UK Wage Pressure Impedes Inflation’s Retreat

In the UK market, since the government announced its budget last November, UK gilt yields have dropped sharply and are now trading near their lowest levels in over a year. Becker warned of this, pointing out that investors are overlooking a key fundamental factor, namely that wages in the UK are too high, making it difficult to bring inflation back down to the Bank of England’s 2% target.

"The UK’s inflation challenge may not be as over as the recent rebound suggests," Becker added, implying that the market’s optimism about UK bonds may be premature.

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