LONDON- BlackRock Investment Institute (BII) predicted on Tuesday that developed market government bond returns would be negative over the next five years and raised its outlook on credit to "modestly overweight" on extraordinary central bank measures.

"Developed market central bank actions should pave the way for lower volatility in interest rates, providing a stable environment for credit spreads to narrow," said BII head Jean Boivin, adding the backdrop for credit was now favourable.

"The risk of temporary liquidity crunches remains. Yet valuations have cheapened and coupon income is crucial in a world starved for yield."

Boivin said he expected only a gradual rise in developed market yields after they dropped sharply in recent months and with monetary and fiscal policy coordination bound to suppress rates in coming years.

"This diminishes the strategic case for holding nominal government bonds," he added.

(Reporting by Karin Strohecker; Editing by Dhara Ranasinghe) ((karin.strohecker@thomsonreuters.com; +442075427262; Reuters Messaging: karin.strohecker.reuters.com@reuters.net))