BlackRock's investment think tank has noted that the AI investment surge, persistent supply shocks, and substantial government borrowing are accelerating the repricing of long-term interest rates. In this context, government bonds are losing some of their effectiveness as a portfolio "anchor," but they are offering more income, creating opportunities for investors to build sustainable earnings streams.

The repricing of global long-term bond yields has already progressed significantly. The yield on the U.S. 10-year Treasury has risen from under 1% six years ago to nearly 5% currently. German 10-year bond yields recently hit a 15-year high, while Japanese 10-year yields have approached 3% for the first time since the mid-1990s. The structural trends driving this yield increase have been building for years but have been further reinforced in the current year.

The AI investment boom, already historically fast, is now accelerating again. Market consensus for the capital expenditure of hyperscale cloud providers in 2026 has been revised upward by about 30% over the past six months, reaching $720 billion. Meanwhile, increased sovereign borrowing, persistent fiscal deficits, and a shift in Middle Eastern investment toward more domestic priorities have reduced capital available for overseas investment, intensifying competition for funds. Scarcity-driven inflation, amplified by Middle Eastern energy and commodity shocks, has pushed market expectations for the Federal Reserve from a dovish stance to a tightening one, driving global bond yields higher. Recently, new uncertainty surrounding the Fed's reaction function—following the appointment of Kevin Warsh as Fed Chair—has further lifted the term premium.

Higher yields are changing the role of government bonds in portfolios and reshaping the opportunity set for investors. The effectiveness of bonds as a portfolio "anchor" has indeed declined. Over the past five years, the average daily return correlation between U.S. stocks and 10-year Treasury bonds has been 7%, compared to an average of -43% in the decade before the pandemic. However, higher yields have also created attractive income opportunities, reinforcing the "durable income" investment theme. Currently, over 80% of bonds in the global bond market offer yields above 4%, compared to about 20% in the decade before the pandemic.

BlackRock's think tank stated that, rather than extending duration further along the yield curve, it prefers to build durable income through medium-to-short-term U.S. Treasuries, local-currency emerging market debt, short-duration Eurozone bonds, agency mortgage-backed securities, and selected public and private credit assets with robust cash flows. Higher borrowing costs have also raised the bar for equity investments, but companies with earnings growth outpacing the rise in borrowing costs are still expected to outperform the market. Nonetheless, the think tank anticipates a wider divergence in performance among companies, thereby enhancing the value of active investment.