Although long-term government bond yields are no longer as effective as a portfolio ballast, the higher yields on offer is creating an opportunity for the role of income in portfolios.

This is according to the BlackRock Investment Institute, which in a recent note said that bonds now give investors more opportunities for durable income.

“Higher yields have changed both the role of government bonds in portfolios and the opportunity set for investors,” the note said. “Bonds have become a less effective portfolio ballast.”

“The correlation between daily US equity and 10-year Treasury returns averaged 7% over the last five years, compared to -43% in the decade prior to the pandemic.”

“Still, higher yields have created attractive income opportunities, reinforcing our durable income theme. More than 80% of the global bond universe now yields above 4%, versus around 20% in the decade pre-pandemic.”

However, global investors appear to be more concerned about inflation and how the US Federal Reserve will respond, given the recent removal of forward guidance from the newly appointed chairman.

This, combined with a prolonged conflict in the Middle East putting pressure on energy supplies, has come alongside a sell-off in long-dated US Treasuries.

The 30-year yield has risen to a 19-year high of 5.28%, while the 10-year yield has increased to the 4.7% level, close to what it was during the peak of the rate hiking cycle in 2023.

BlackRock said: “What was already the fastest AI investment boom in history has accelerated further, with consensus forecasts for hyperscaler capital spending in 2026 revised about 30% higher over the past six months to $720 billion.”

“Greater sovereign borrowing and persistent fiscal deficits, alongside a shift in Middle Eastern investment toward domestic priorities, have reduced capital available for overseas investment and further intensified competition for capital.”

BlackRock said that supply scarcity, energy constraints, a tight labour market and fragmenting geopolitics is occurring alongside what could be one of the largest AI investment cycles in history.

As such, it argued that this backdrop strengthens the case for active investing, favouring short- and medium-term Treasuries.

BlackRock also said it prefers local-currency emerging market debt, short-maturity euro area bonds, agency mortgage-backed securities and selected public and private credit.