(Bloomberg) -- The chorus of buy calls on government bonds is growing louder but BlackRock Inc. begs to differ.

The firm’s top conviction is to avoid long-term sovereign securities as debt levels rise, government borrowing climbs and inflation hits elevated levels. Investors will increasingly demand higher yields to compensate and interest rates may stay higher for longer than the market is expecting, according to the world’s biggest money manager.

“We are underweight nominal long-term government bonds in each scenario in this new regime,” vice chairman Philipp Hildebrand and his colleagues wrote in a report that examined four different market outlooks. “Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets.”

A record annual rout in Treasuries is forcing fixed-income investors to reassess their game plan for 2023 as some strategists warn that optimism about a peak in the rate-hike cycle may be premature. Market players are divided on the outlook, with the likes of Fidelity International and Jupiter Asset Management piling into bonds to counter the risk of a recession. 

BlackRock’s call is based on the view that long-term government debt no longer fulfills its traditional role as a portfolio diversifier due to persistent inflation. Benchmark 10-year Treasury yields almost tripled from the year’s low to reach 4.34% in October after the Federal Reserve jacked up rates aggressively to tame the highest inflation in four decades. 

Yields on 10-year US bonds slipped one basis point to 3.60% on Tuesday. 

“We see investors demanding higher compensation for holding them as central banks tighten monetary policy at a time of record debt levels,” the report said, referring to long-term sovereign notes.

BlackRock Strategists Say Central Banks Won’t Save the Day

While central banks around the world try to slow price growth, BlackRock reckons long-term drivers such as aging workforces would keep pressures above pre-pandemic levels. The firm favors inflation-linked bonds to protect its portfolio. 

(Updates with US yields in sixth paragraph)

©2022 Bloomberg L.P.