BlackRock says investors set to face 5.5% long-term borrowing costs
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The world’s largest asset manager sees benchmark US borrowing costs hovering around 5.5 per cent for the next five years as investors grapple with inflationary pressures.
Ten-year yields are at 4.5 per cent, but Jean Boivin, head of the BlackRock Investment Institute and a former deputy governor of the Bank of Canada, said markets were heading for much higher long-term borrowing costs. These would come from ageing populations, fractious geopolitics and costs associated with the energy transition, he said.
“We think 5.5 per cent long-term 10-year yields in the US is the level that seems consistent with the macro backdrop in the next five years,” Boivin told the Financial Times. “It’s also consistent with the compensation for risks that bond investors should require to invest in long-term bonds.”
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Following months of strong US economic data, much weaker than expected manufacturing figures this week were another factor that pushed Treasury yields lower.
While Boivin said he thought 10-year yields would settle at about 5.5 per cent over the next five years, he expected that level could take six to 12 months to reach given the surge in yields that has already happened this year.
In a world where 10-year yields are persistently close to 5 per cent, BlackRock calculates that the costs for servicing US debt at its current level would be about 14 per cent of the country’s budget. That sum, Boivin pointed out, is greater than the amount the country spends on Medicare, the taxpayer-funded healthcare plan for retirees.
“I think it will put significant pressure on governments and the US,” Boivin said. “The fiscal implications of these rates is going to be a big story — I don’t think it has been digested yet by markets or by governments.”
