BlackRock, wary of U.S. fiscal outlook, cautious on long-term Treasuries before elections

Staying overweight on U.S. stocks (SP500)(SPY) but being cautious on long-term Treasuries is how BlackRock Investment Institute (BII) said it’s approaching the U.S. presidential election in November.

It’s cautious on government bonds as budget deficits are “set to stay large” no matter who wins the U.S. elections, the institute said in a Monday note, looking at political contests as more than half of the world’s population votes this year.

In November, U.S. President Joe Biden is expected to face-off against former President Donald Trump, the presumptive Republican presidential nominee. Under both of their terms, fiscal deficits – or the shortfall in government revenue versus spending – swelled because of spending stoked by the pandemic, the institute said.

“Neither is charting a path to a sustained reduction in deficits,” BII Head Jean Boivin wrote in its weekly outlook. The deficits reinforce persistent inflation, and the institute’s view that the Federal Reserve will need to keep interest rates higher for longer.

“We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term U.S. bonds,” Boivin said about its cautious stance.

Here’s a chart from BII on the average U.S. fiscal deficit as a share of GDP going back to 1960:

The Fed is not expected to cut its key rate from 5.25%-5.5% at its June decision due Wednesday. Treasury yields (US10Y) surged on Friday as investors pushed back rate expectations after May’s U.S. payrolls report came in hotter-than-anticipated. Yields jumped as prices fell.

Alongside the U.S. presidential race, all 435 seats in the House and 34 of the Senate’s 100 seats will be up for a vote.

Among bond ETFs to track: (TLT), (BND), (VCIT), (IUSB).