BlackRock cautious on long-term US Treasuries ahead of elections

By Davide Barbuscia

NEW YORK (Reuters) - The BlackRock Investment Institute said on Monday it was cautious on long-term U.S. Treasuries ahead of the November presidential elections as investors will likely ask for more compensation to hold them because of wide fiscal deficits.

"We stay overweight U.S. stocks before the U.S. election yet cautious on long-term U.S. Treasuries. No matter who wins, budget deficits are set to stay large," the institute, an arm of top asset manager BlackRock, said in a note.

Neither President Joe Biden or Republican challenger Donald Trump "is charting a path to a sustained reduction in deficits," said the institute. Large deficits will keep inflation high, with interest rates therefore likely to remain elevated for long.

"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," it said.

The institute maintains an "overweight" recommendation for short-term U.S. Treasuries saying it prefers them in a high interest rate environment, and remains neutral on longer-dated U.S. government bonds.

With no end in sight for large fiscal deficits, some investors have started to allocate funds in ways that would avoid losses if Treasury yields, which move inversely to prices, start surging because of supply and demand imbalances.

This week, the Treasury will sell nearly $120 billion in bonds with maturities of three, 10 and 30 years.

Demand for every auction is closely scrutinized because of jitters around U.S. debt sustainability, said Jimmy Chang, chief investment officer at Rockefeller Global Family Office.

He expects a return of so-called bond vigilantes, investors who punish profligate governments by selling their bonds, but said the timing is uncertain.

"Politicians don't win elections or re-elections on the promise of austerity ... Eventually, I guess, the outcome will be the market disciplining Washington," he said.

(Reporting by Davide Barbuscia; Editing by Susan Fenton)