Bonds Stink as a Refuge From Stocks, but BlackRock Sees a Work-Around

Nowhere to run, nowhere to hide. That old R&B song seems apropos these days, as inflation, war, disease and clogged supply chains do a number on the stock market, with the S&P 500 down almost 3% Monday and 11.9% for 2022.

Trouble is, traditional bonds aren’t offering a stock-burned investor their classic sanctuary. Asset management goliath BlackRock says that developed market fixed-income issues in general aren’t such a hot idea. Reason: They are “ineffective portfolio diversifiers” with inflation roaring, the BlackRock Investment Institute contends in a research note. At least they are right now, with inflation roaring.

That makes sense. Inflation, now at 7.5% annually in the U.S., damages bond prices. As the report puts the matter, “government bonds historically offer less diversification during periods of supply-driven inflation, such as we’re seeing now, and exacerbated by the conflict” in Ukraine, which is helping spike oil prices to over $120 per barrel.

Traditionally, Treasury and high-grade corporate paper offer refuge when stocks tank. Not so much lately. The Bloomberg US Agg Total Return index, which covers government bonds and investment-grade corporates, is off 3% this year. The benchmark 10-year Treasury’s yield topped 2% in mid-February and since has fallen back to 1.75%, as investors looking for safety crowded into the T-note. But the bond’s total return (price plus yield) has lost around 2% this year.

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Where then should investors turn for the ballast that Treasury and high-end corporate obligations once offered?

BlackRock’s answer: U.S. Treasury inflation-protected securities, known as TIPS, and Chinese government bonds.

TIPS at present might not seem like such a great investment. The 10-year has a yield of minus 1%, and the exchange-traded fund tracking the category is negative 0.7% total return. Remember that these yields are inflation-adjusted, so they are the reverse image of regular Treasury bonds’ nominal (not adjusted) rates. Also, the gains come in twice-annual inflation adjustment to principal, so there’s a lag time. TIPS are best treated as buy-and-hold instruments.

If inflation keeps running high, BlackRock reasons, then TIPS will pay off. As the firm’s analysis put it, “we expect inflation to be persistent and settle at a higher level than” pre-pandemic.

Chinese government bonds should do well, BlackRock reasons, because Beijing seeks to ease monetary policy and is intent on expanding the nation’s economy at a faster pace, after an officially induced slower period. The 10-year has a 2.8% yield and is selling at quite a discount to par value (75%), which means the price has a lot of room to grow.

All that said, BlackRock does believe that equities are the best investment, long term. It is overweight U.S. stocks despite today’s woes. That is owing to “still strong earnings momentum,” the note declares.

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Tags: 10-Year Treasury, BlackRock, Bonds, Chinese government bonds, Inflation, S&P 500, Stocks, TIPS

The Canada Pension Plan Investment Board has announced a plan for the pension fund to commit its C$550.4 billion (US$433.6 billion) portfolio and operations to becoming net-zero of greenhouse gas emissions by 2050.

“The impacts of climate change on the investment landscape are undeniable and have fundamentally transformed the nature of business risks and opportunities,” CPPIB President and Chief Executive Officer John Graham said in a statement. “Committing our portfolio and operations to net-zero by 2050 will help us manage the risks.”

The pension fund said that to reach its goal, it will nearly double its investments in green and transition assets to at least C$130 billion by 2030 from C$67 billion as of the end of 2021. It also said it will achieve carbon neutrality for its internal operations by the end of fiscal 2023. The fund said it deems an asset to be green if at least 95% of its revenue can be classified as being derived from green activities, per the International Capital Markets Association. And it considers an asset to be in “transition” if it has committed to reaching net-zero with a credible target and plan, and if it is making “meaningful contributions” to the reduction of global emissions.

CPPIB also said it would emphasize active engagement with its portfolio companies over divestment, and use an investment approach that aims to identify attractive opportunities to fund and support companies that are committed to creating value by lowering their emissions over time.

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“Though encumbered with high emissions today,” CPPIB said in its plan, “we believe select companies can profitably transition over the mid- to long-term, with the right interplay of leadership, accountability, innovation, and capital.”

The pension fund also said that if its expectations on climate-related oversight are not being met by any of its portfolio companies, it will not support the reappointment of the company’s directors. It also said in its net-zero plan that as an active manager, it is “prepared to make prudent sell decisions,” when it concludes that companies are at risk of permanently impairing shareholder value.

CPPIB joins fellow Canadian pension funds Caisse de dépôt et placement du Québec and Ontario Municipal Employees’ Retirement System, which made pledges in October and December, respectively, to reach net-zero emissions by 2050.