BlackRock Turns Bearish on Long-Term Treasuries Amid AI Funding Wave

NEW YORK — BlackRock has turns bearish on long-term Treasuries amid an AI funding wave, warning that surging AI funding wave could push U.S. debt higher and keep yields elevated.The signal is a major departure from BlackRock's previous viewpoint on holding long-term Treasuries.

In its updated global investment outlook published on Tuesday, the organization stressed how tech giants and investors have concentrated AI as the core of future growth. The change has led to the rise of new debt expectations in the range of several hundred billion over the next few years to cover expenses of AI research, development, and implementation.

Even though the institute doesn't see these debt issuances as causing an immediate deterioration of corporate balance sheets, it pointed out that the risk is there on a much broader systemic level. Considering that the U.S. national debt is over $38 trillion, the simultaneous increase of borrowing in both public and private sectors may result in a rise of financing costs and create difficulties for the financial system.

The report states "increased borrowings both from the public and private sectors will most likely keep the pressure on interest rates high," thus sustaining worries about the difficulty of long-term debt servicing as yields rise.

The biggest danger, according to the think tank, is the very sudden and strong increase in bond yields–which could be caused by fiscal instability, inflation worries, or political conflicts about debt management–that would result in a chain of events leading to their warnings. In a reaction to these risks, BlackRock has changed its view on holding long-term Treasuries from "neutral" to "underweight" meaning it would lessen the holdings of such securities in the coming six to twelve months.

While AI-driven spending might, at some point, provide the government with extra revenue and ease the debt situation, BlackRock warned that such a future was far off. The report said, "More debt in the system makes it more susceptible to sudden incidents such as bond-yield spikes caused by fiscal concerns or policy disagreements."

The forecast indicates that technology changes add a layer of complexity on top of inflation management, economic growth sustaining, and debt stabilizing tasks that policymakers have to face.

While not supportive of the bond market, BlackRock still believes that AI could be a major driver of the U.S. equity market in 2024. The firm is optimistic about AI-fueled productivity improvements that could increase both corporate revenues and economic growth, however, it also points out that benefits will most likely be unevenly distributed across sectors and companies.

“New revenue streams solely based on AI use are highly probable,” the institute added. “The way those revenues are shared will change, and we don't know how at this point. The play on the winners will be an active investment narrative.”

On the world stage, the company decided to scale down its holdings in Japanese government securities as it expected that there would be a rise in interest rates and an increase in bond supply. It also raised its position in emerging-market hard-currency debt, pointing out that limited supply and strong government balance sheets were the main reasons.

Besides the changes in its international portfolio, BlackRock also made further adjustments such as deepening its underweight position in Japan and increasing its exposure to emerging ​‍​‌‍​‍‌​‍​‌‍​‍‌markets.