BlackRock Says the Market Has the Fed Wrong. It’s Buying Treasuries With Yields Above 5%
BlackRock just made its most aggressive shift in bond strategy since 2020, pulling money out of stocks to do it, but the real question is whether the Fed will cooperate or blow up the trade entirely.
On October 12, 2026, the BlackRock Investment Institute ended the Treasury underweight it first adopted in October 2020, when it put the ten-year yield at about 0.9%. In a weekly commentary called Upgrading U.S. Treasuries to Lock in Income, the authors wrote: “We are upgrading shorter-term Treasuries to overweight” and moving “long-term Treasuries to neutral as higher yields now provide better compensation for interest-rate risk.”
The note also explains how the move was paid for: “We also fund the Treasury upgrades by closing our long-held U.S. equity overweight to neutral.” The same note says “We remain constructive on AI,” but the institute still moved money out of stocks to pay for the bond upgrade.
The commentary is an allocation view from strategists. It leaves trading and fund selection to investors. The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) and the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) illustrate the two halves. BlackRock sponsors both, so it collects fees if investors follow its view.
Both funds barely moved. TLT rose 0.09% to $78.05, and SHY moved -0.04% to $81.17.
A Fed Call Disguised as a Bond Call
The BlackRock Investment Institute says markets have priced in 160 basis points of additional Fed tightening over the next 12 months since January. A basis point is one-hundredth of a percentage point. The institute said: “We think that is overdone.”
The BlackRock Investment Institute puts the ten-year yield at about 5.25%, up 110 basis points this year, and notes the yield briefly went above 5.3%, a multi-decade high. It mainly credits higher real rates (yields after inflation) and links the jump in rate-hike expectations to Middle East tensions and higher oil prices.
The BlackRock Investment Institute also figures that yields can rise another 75 basis points over the coming year before Treasury total returns turn negative, because coupon income offsets the price loss. That reasoning relies on carry, the income a bond pays while you hold it, and it breaks if yields rise faster than the cushion.
SHY yields 3.63%, holds $26.81 billion, and gained 1.44% in price over the past year, which suggests it has mostly collected its coupon.
TLT yields 4.99% and holds $48.66 billion, but it returned -9.87% over the year and -3.10% over the past month. It trades much closer to its one-year low of $76.43 than to its high of $92.19. That price risk explains why the institute stopped at neutral.
What Could Undo the Upgrade
The Fed has been raising rates, adding 1/4 percentage point in September. Its next meeting falls at the end of October, and an oil-driven increase there would quickly use up the cushion.
The institute calls this risk management: “We are managing near-term risk, not changing our core convictions.” It still favors AI-related companies, listed infrastructure and emerging-market stocks, and the BlackRock Investment Institute expects nearly 30% third-quarter S&P 500 earnings growth.
The institute cut agency mortgage-backed securities to neutral and reduced its underweight on Japanese government bonds. The Treasury upgrade is a little late, since options traders were already calling a bottom in the bond rout after a strong 10-year auction.
How SHY and TLT Line Up With the Institute’s Call
Of the two funds, TLT carries far more price risk than SHY, which matters most for income-focused investors near retirement. SHY lines up with the half of the call the institute actually upgraded, and it carries little price risk if the Fed increases again.
TLT stands to gain the most if the Fed stops increasing soon, but its price has swung far more than SHY’s over the past year. A neutral rating means holding the market weight, and that is a weaker recommendation than an overweight.
If the Fed holds at its late-October meeting and TLT closes back above its mid-September level of $80.55, the case for the long end would improve. Closing below $76.43 would show the institute was right to hold back on long bonds.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
