BlackRock increases large-scale U.S. Treasury short positions: warning that a "sharp rise" in inflation will drive up financing costs

Ask AI · Tom Becker shifts from shorting UK bonds to shorting German bonds. What is the logic behind this strategy?

German government bonds are facing bearish bets from the world’s largest asset management firm. BlackRock’s funds have significantly increased their short positions in German bonds, betting that soaring European inflation will push yields above the 15-year high reached last week.

According to Bloomberg, Tom Becker, a fund manager at BlackRock managing $6.5 billion, said that since the outbreak of the Middle East conflict a month ago, he has continued to add to five-year and ten-year German bond shorts, having previously held a thirty-year short. He expects Europe will experience “a substantial increase in inflation,” as governments expand fiscal spending to cope with rising energy prices and military preparedness, which will significantly increase bond supply, thereby lowering bond prices and pushing yields higher.

The yield on ten-year German government bonds rose to 3.13% last week before retreating to around 3%. But Becker believes this correction will not last, and yields will rise again and break previous highs, as markets may underestimate the fiscal response of European policymakers to energy security and military investments.

European inflation pressures exceed other regions

Becker points out that Europe will face greater inflationary pressures from this energy shock than other regions, primarily due to its high dependence on the Strait of Hormuz for energy and relatively fragile trade conditions.

Since the outbreak of the Middle East conflict, global crude oil prices have surged past $100 per barrel, putting pressure on the eurozone bond market. Although the sell-off in eurozone bonds is less intense than in the US and UK, Becker believes the inflation impact on Europe will be more profound.

Meanwhile, several European countries have announced measures to cut subsidies on consumer energy bills, and the EU Commission is also expected to introduce a package to address high energy prices. This has raised concerns that Europe could replay the script from 2022 to 2024 — when large-scale energy subsidies during the Russia-Ukraine conflict led to a significant expansion of fiscal deficits.

Fiscal expansion boosts bond supply

Becker’s shorting logic centers on fiscal expansion leading to greater bond supply. He states that the tendency of governments “to respond to every crisis with fiscal measures and issue more debt” has been a key reason why he has long viewed inflation as a major risk.

“3% nominal interest rates are not high, especially in a context where inflation is again exceeding targets and more bond supply is coming with larger fiscal responses,” Becker said. He believes that as investors demand higher term premiums for long-term bonds, the yield on ten-year German bonds will further rise.

Beyond German bonds, Becker also focuses on the forward level of the five-year yield five years out — a metric often seen as an alternative reference for the ten-year rate. He believes this rate should align more closely with similar levels in the US and UK. Currently, the German ten-year yield is 3%, significantly below the US Treasury yield of 4.4%, indicating there is still considerable room for German yields to rise.

Profiting from shorting UK bonds, now shifting to German bonds

This bet is not Becker’s first contrarian move. Earlier this year, he established short positions in US and UK bonds, at a time when markets widely expected the Federal Reserve and Bank of England to cut interest rates at least twice by 2026.

The outbreak of the Middle East conflict has completely overturned those rate cut expectations. After oil prices broke above $100, money markets priced in no rate cuts from the Fed this year, while the Bank of England and the European Central Bank are expected to hike at least twice each.

The shift in outlook has allowed Becker to profit from his short UK bonds, with his tactical opportunity fund gaining nearly 3% over the past month, while Bloomberg-tracked peer funds have averaged a loss of about 4%. He has now taken some profits on UK positions and shifted his focus to the German government bond market.