Neutrality is a ghost.
For decades, the financial industry worshipped at the altar of the neutral portfolio. The 60/40 split was not just a strategy; it was a security blanket. But as of December 17, 2025, that blanket has been shredded by the reality of persistent fiscal dominance and a bond market that no longer behaves like a hedge. When Natalie Gill of the BlackRock Investment Institute first posited that a neutral stance was a fallacy, she was viewed as a provocateur. Today, the data proves she was a realist. In a world where the 10-year Treasury yield sits stubbornly at 4.42% despite three quarter-point cuts this year, the concept of a ‘safe’ middle ground has evaporated.
The Trap of Passive Correlation
Volatility is no longer a visitor; it is the landlord. The fundamental error of the 2024-2025 cycle was the assumption that inflation would return to a tidy 2% and stay there. Instead, we have entered a period of ‘jagged normalization.’ As the Federal Reserve concluded its final meeting of 2025 yesterday, the rhetoric shifted from ‘soft landing’ to ‘structural persistence.’ This shift has rendered passive allocation dangerous. When equities and bonds correlate positively during inflationary spikes, the traditional hedge fails. We are seeing a massive migration into ‘High-Conviction Tilts,’ where investors must choose between aggressive growth in AI-integrated infrastructure or defensive liquidity in private credit.
The technical mechanism behind this failure is the ‘Correlation Convergence.’ In a low-rate environment, bonds provide a buffer. In the current high-debt, high-issuance environment of late 2025, the sheer volume of Treasury supply—estimated to hit record levels in the coming fiscal year—is crowding out the diversification benefit. You are no longer buying a hedge; you are buying a piece of a sovereign debt crisis.
The BlackRock Pivot in Retrospect
Looking back at the BlackRock Investment Institute outlooks from late 2024, the warning signs were clear. They argued that macro volatility required a departure from the benchmark. In the last 48 hours, institutional flow data suggests that ‘Neutral’ is being replaced by ‘Asymmetric.’ Large-scale asset managers are no longer looking for a 5% return across the board; they are barbell-ing their portfolios. On one side, they hold extreme cash equivalents to capitalize on the next credit crunch; on the other, they are overweighting the ‘Energy-AI Nexus’—companies that control the power grids necessary for the next generation of data centers.
Comparing the 2024 Projection to the 2025 Reality
The following table illustrates the divergence between the ‘consensus’ expectations held at the start of this year and the hard data we are facing as we close out December 2025.
| Metric | 2024 Consensus Projection | December 17, 2025 Reality | The ‘Alpha’ Difference |
|---|---|---|---|
| Fed Funds Rate | 3.50% | 4.75% | Underestimated sticky services inflation |
| 10-Year Treasury | 3.75% | 4.42% | Term premium return due to deficit fears |
| S&P 500 Concentration | Top 10 = 25% | Top 10 = 36% | AI monetization outperformed general economy |
| Gold (Spot) | $2,100 | $2,850 | Central bank de-dollarization acceleration |
Active Management is a Requirement Not an Option
The ‘Set it and Forget it’ era died when the cost of capital stayed above 4% for more than 24 months. For a firm like Nvidia or Apple, this is a minor hurdle. For the ‘Zombie’ companies of the Russell 2000, it is a death sentence. According to recent Reuters financial reporting, corporate defaults in the sub-investment grade sector have ticked up by 14% in the last quarter alone. This is where active management earns its fee. A neutral index fund captures the winners, but it also anchors you to the sinking ships. Proactive allocation involves the surgical removal of high-leverage entities that cannot refinance in this ‘Higher for Much Longer’ environment.
The Forward Outlook for 2026
As we pivot toward the new year, the ‘neutral’ myth will likely be buried for good. The market is no longer pricing in a return to the old normal. Instead, the focus is shifting toward the upcoming March 20, 2026, Treasury refunding announcement. This specific data point will determine if the private sector can continue to absorb government debt without a total spike in yields. Watch the 10-year term premium closely; if it breaks 50 basis points in the first quarter of 2026, the ‘neutral’ portfolio won’t just be a fallacy—it will be a liability.
