(Reuters) - BlackRock Investment Institute on Monday cut its rating on developed market equities to "neutral", after being "overweight" since the end of pandemic lockdowns in Western nations, due to attractive valuations.
The institute, an arm of the world's largest asset manager, said it had also turned more positive on the prospects of developed market short- and medium-term sovereign bonds after a recent surge in yields.
It has had an underweight rating for developed market government bonds since March 2020, but as yields have been rising it has trimmed that position and changed it to neutral on Monday. Bond yields rise when prices fall.
While it is optimistic on short- and medium-term paper, the institute remains bearish on long-term government bonds as it expects yields to climb more as investors demand more term premium - or compensation for the risk of holding long-dated securities.
"We also see weaker demand for bonds amid rising debt levels," the institute said in a note.
"Central banks are no longer reinvesting the proceeds of maturing bonds as part of quantitative tightening, and investors are struggling to digest a flood of new bonds," it said.
US Treasury yields hit 16-year highs last month but have retrenched this month on expectations the Federal Reserve has reached a peak in its interest-rate hiking cycle, and as the Treasury announced a more modest year-end schedule of Treasury debt sales. Benchmark 10-year Treasury yields stood at 4.447% on Monday, down from a 16-year high of just over 5% last month.
"We think yields will stay volatile but ultimately resume their climb in the long term," said the institute, an arm of US-based investment firm BlackRock that provides proprietary investment research.
Expectations that interest rates will remain high for a long has led to a more bullish view on inflation-linked bonds.
"High rates are a core tenet of the new regime," said the institute. "We are strategically overweight DM inflation-linked bonds where we see higher inflation persisting."