Recently, BlackRock hosted a “Fixed Income Roundtable” where they had several of their strategists and portfolio managers talk with the media. The lineup of speakers resembled the 2000 NY Yankees; every speaker was “hall-of-famer” or emerging “all-star” of the fixed income world. I am going to focus in the comments made by Rick Rieder and Sergio Trigo Paz.
Sergio Trigo Paz
Head of Blackrock’s Emerging Markets Fixed Income within the Portfolio Management Group
Sergio Trigo Paz repeatedly mentioned one trend which would have dramatic and long-lasting implications for emerging market fixed income investing. Insurance companies and pension funds are looking to double their investment in emerging market bonds from about 4% of their portfolios to 8%. To put this change in context, a reallocation of just 1% would mean about $480 billion dollars flowing into emerging market debt. In 2012, inflows were only around $70 billion Mr. Trigo Paz forecasts that emerging markets corporate and sovereign issuance will exceed $350 billion in 2013.
Besides altering the balance between supply and demand, the influx of insurance company and pension fund money should create more price stability for emerging market bonds. Sergio Trigo Paz was having conversations with multiple investors that planned to hold debt to maturity, and were matching the income flow from the emerging market bonds that they were buying to specific liabilities. While these investors could always sell their bonds as a result of changing market conditions, their approach is long-term and they are less likely to sell in reaction to short-term market fluctuations. More emerging market bonds in the hands of long-term investors, instead of the more short-term oriented hedge funds, should mean less volatility.
Here’s what Sergio Trigo Paz had to say about why people are buying emerging market bonds. “By buying a name that most investors won’t recognize located in South America, you can earn 100 bps more yield than buying bonds from a corporation headquartered in the US.” Rick Rieder added that the higher yield of emerging market and high yield bonds made them less sensitive to rising interest rates than treasuries or investment grade corporate bonds.
Should you buy emerging market bonds denominated in the local currency? Both Sergio Trigo Paz and Rick Rieder made statements that were bullish on the dollar. One reason that they provided was the United States moving toward energy independence.
Chief Investment Officer of Fundamental Fixed Income
- 10 Year Treasury could reach 2.25% or higher by the end of the year.
- Overall interest rates will remain low for years
- Public perception of the sequester is much more dire than the impact
Rick Rieder made a compelling case for interest rates remaining low. It’s really a question of demographics. In almost every developed nation around the world, including the United States, the average population was increasing in age and workforce participation was dropping. This dynamic is a long-term headwind to economic growth in the developed world. The increasing number of retirees want a steady, dependable income stream, increasing demand for debt products. Slow economic growth and increasing demand for fixed income should keep rates low.
However, Mr. Rieder did predict that the yield on the 10-year would modestly rise from the current yield of 1.92% to 2.25% over the next year. Primarily, this move would come from the Federal Reserve shrinking the size of its $85 billion dollar per month bond buying program sooner than expected.
“Public Perception” was frequently referenced during his comments. Basically, he thought concerns about the impact of Cyprus on the Eurozone and the impact of the sequester on the US economy were overblown. To demonstrate the relative importance of Cyprus to the global economy, he said,at around 10:00 AM “Between now and lunchtime, the U.S. will create the GDP of Cyprus.” To put the sequester in context, Mr. Rieder compared it to the Federal Reserve’s bond buying program which is putting into the U.S. credit markets the same amount of spending that the sequester is removing – except the Fed spending is per month. While the dollar amounts are similar, the sequester receives a higher multiple of the number of new stories than the Fed’s actions around quantitative easing.
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