The Federal Reserve is by far the largest single owner of US government bonds. If the Fed continues its buy-back policy at its current pace, all US government debt will be in the hands of the central bank in less than two years’ time. That’s a good reason to sell Treasuries, says BlackRock.
At the end of March, the Fed owned $3120 billion worth of Treasuries, out of a total stock of $17,000 billion. According to BlackRock, US government debt may no longer be a risk-free asset, forcing investors to review its investment case.
If the Fed lives up to its promise of ‘unlimited’ buying of government bonds, it may have bought up the entire US government bond market within 22 months. On 29 February, for example, the Fed had bought $2470 billion of government debt; a month later, it had bought $650 billion more, bringing its total investments up to $3120 billion.
In the research report Weathering Shocks, BlackRock’s Investment Institute writes that ‘long-term investors must realise that what worked in the past will not work in the future’. That’s a remarkable conclusion: in addition to being the world’s largest asset manager, BlackRock is also the most important advisor to the US Federal Reserve at the moment.
Blackrock investigated two scenarios: a pure price shock and a scenario including a price shock in the foreseeable future, combined with fundamental longer-term assumptions.
For example, a change in monetary and fiscal policy has been examined, which could be linked to a redrawing of global supply chains. This could have an impact on the profitability of companies and could lead to explicit underpricing of government bond markets.
At the end of 2007, for example, an investor received an annual coupon of 400 dollars for every 10,000 dollars he invested in a 10-year government bond. Today, this is only 67 dollars a year - a drop of 83 percent.
The dramatic reduction in expected yields alone is already reason enough for BlackRock to recommend a reduction in the allocation to U.S. Treasuries.
‘Invest more in equities’
BlackRock sees the strategic opportunity to allocate more to equities now that the March fall in prices has made valuations more attractive. In addition to equities, BlackRock also has a preference for credits. They are attractively priced, but there are also late-cycle risks, such as defaults, especially in the high yield market.
Check out the ‘Monthly statements of public debt of the United States’ at the end of February and the end of March. The GDP of the United States in 2019 amounted to almost $21,500 billion.