It's time to rethink bonds, according to the BlackRock Investment Institute, which said "the lure of fixed income is strong" right now. The research arm of BlackRock , one of the world's largest asset managers, urged investors to favor investment-grade bonds, short-term government debt and inflation-linked bonds amid recession fears and higher-for-longer inflation. "Higher yields are a gift to investors who have long been starved for income. And investors don't have to go far up the risk spectrum to receive it," Philipp Hildebrand, vice chairman of BlackRock, and Jean Boivin, head of the BlackRock Investment Institute, wrote in a note last week. Within fixed income, the authors said the outlook for investment-grade bonds had "brightened." "We think it can hold up in a recession, with companies having fortified their balance sheets by refinancing debt at lower yields," they wrote. They also like short-term government debt, which "looks attractive at current yields." On the flip side, long-term government bonds have historically shielded portfolios from the effects of recession, Hildebrand and Boivin said, but "not this time." They now offer little protection against the current macro backdrop, the authors wrote. "Investors also will increasingly ask for more compensation to hold long-term government bonds — or term premium — amid high debt levels, rising supply and rising inflation." The BlackRock Investment Institute has raised its overweight position on investment-grade credit, but remains underweight on long-term government bonds. BlackRock's report comes as consumer prices remain high in the U.S. and beyond, despite the best efforts of central banks to aggressively hike interest rates to cool demand. BlackRock says inflation will remain well above central banks' targets in the coming years, adding that: "More volatile and persistent inflation is not yet priced in by markets, we think." As such, Hildebrand and Boivin also favor inflation-linked bonds. "The market's wishful thinking on inflation is why we have a high conviction, maximum overweight to inflation-linked bonds in strategic portfolios and maintain a tactical overweight no matter how the new regime plays out," they added. In a separate note last week, BlackRock's ETF division said the investing environment had fundamentally changed , which has "profound implications" for portfolios looking ahead. In its 2023 investor guide, BlackRock's iShares said it was "time to consider a new portfolio playbook."
