Rick Rieder, Chief Investment Officer of Fundamental Fixed Income at BlackRock, told USA TODAY’s Adam Shell that while the Fed will start hiking short-term interest rates in 2015, the transition to higher borrowing costs won’t lead to massive turbulence in the bond market or cause yields on longer-term bonds to skyrocket as many on Wall Street fear.
With the job market picking up and unemployment, currently at 5.8%, the Fed is expected to begin raising short-term rates for the first time since 2006. Rieder, who oversees $680 billion in assets, predicts Yellen will boost the Fed funds rate, now pegged at 0% to 0.25%, to 1%.
But unlike some doomsayers, Rieder, struck a less ominous tone on how markets would react to a less-accommodative Fed. For one, he downplayed a bursting of what many pundits say is a bubble in the bond market.
“The bond bubble story started about five years ago,” Rieder says. “But the reason why bubbles burst is you have too much supply relative to demand. But today in the interest rate and fixed-income world you have a dynamic where you have too much demand relative to supply. And that is the inverse of what a bubble is.”
The reason: In today’s world most countries are deleveraging, or paying down debt or borrowing less. That translates to less leverage in the system.”So what happens,” Rieder says, “is you don’t produce enough fixed income assets.”
“I think the concept, that when the Fed starts moving that it is going to be a problem for markets, is dramatically overblown,” says Rieder, who manages three bond funds for BlackRock, including its Total Return Fund, its Strategic Income Opportunities Fund and Core Bond Fund. “We think that we will be in a low-rate dynamic for a very long time.”
You can watch Rieder’s full interview here.
Todays Other Top Stories
Learn Bonds: – Guess who beats Apple and Alibaba in bond sales? – In dollar denominated corporate bonds, Medtronic, Inc. sold $17 billion in an effort to fund next year’s acquisition with Covidien, a hospital supplies manufacturer in Ireland. Ranked as the largest corporate bond sale in 2014, Medtronic’s sale pulled in orders of $45 billion, beating out April’s bond offering by Apple of $12 and last month’s offering by Alibaba of $8 billion.
Providence Journal: – Are you prepared for short-term rates to rise? – Portfolio manager Craig Brandon offers his thoughts on the floating-rate municipals asset class and Eaton Vance Floating-Rate Municipal Income Fund (the Fund), the first floating-rate municipal income mutual fund offered to U.S. investors.
Financial Advisor: – Best execution’ rule for muni bonds transactions approved. – The Municipal Securities Rulemaking Board on Monday received final approval from the Securities and Exchange Commission for a requirement that retail investors get the best executions of their municipal bond transactions from brokers starting December 7, 2015.
Bloomberg: – States across U.S. seen reducing taxes by the most since 2001. – U.S. states are taking advantage of an expanding economy to cut taxes by the most in 14 years while spending more on education and other programs, according to the National Association of State Budget Officers.
Bloomberg: – Puerto Rico lawmakers pass $2.9 billion debt plan with rate cap. – Puerto Rico’s legislature passed a $2.9 billion borrowing measure that would repay money owed to the Government Development Bank and fund public transportation.
Bloomberg: – Bond traders double down on no-inflation in ETFs. – Trading in two of the biggest exchange-traded funds that buy U.S. government debt shows investors are backing away from bets on inflation picking up at the fastest pace this year.
Bloomberg: – Treasuries advance on refuge demand as global stocks decline. – Treasuries rose, pushing 10-year note yields down to a one-week low, on demand for safety as stocks fell around the world and as China tightened lending rules for local governments.
Business Insider: – Bonds are going bananas. – Stock markets everywhere are a disaster on Tuesday. But a few asset classes are rallying, and one staging a furious rally is US Treasury bonds.
High Yield Bonds
FT Adviser: – A new frontier for yield. – (Subscription) With developed market bonds yielding record low returns, fund managers are venturing into frontier and emerging markets – notably in Africa, the fashionable destination for intrepid investors.
Reuters: – Franklin income fund hit by oil slump, but sees opportunity. – The Franklin Income Fund is used to top-dog status among its mutual fund peers, but a 40 percent slide in oil prices since June has hammered its recent performance.
Zero Hedge: – High-yield credit crash accelerates. – High-yield energy bond spreads are crashing. Up 15bps to 880bps today, these are record wides and massively impact the economics of these firms – no matter how much investors want to ignore it. This is contagiously spreading across the broad high yield and even investment grade credit markets as high yield bond prices crash below the mid-October Bullard lows.
Barron’s: – HSBC’s Pedley warns on Asian high yield bonds. – Benjamin Pedley, regional head of investment strategy for Asia at HSBC Private Bank, has a message for the region’s private banking customers: you are holding too many Asian high-yield bonds.
WSJ: – What the strengthening dollar means for emerging markets. – The red-hot dollar means heftier costs for companies and governments in emerging markets when their debt bills come due, but investors are not sounding the alarm.
Bloomberg: – Singer default deal odds diminish on Argentina debt sale. – Argentina’s plan to push out debt maturities and raise $3 billion locally may allow it to delay a settlement with holdout creditors who tipped the nation into default, according to JPMorgan Chase & Co. and Emso Partners.
Bloomberg: – Jack Bogle: I wouldn’t risk investing outside the U.S. – Founder of Vanguard, Jack Bogle doesn’t like investing outside the U.S. saying: “it’s hard to believe that the differences in returns over the long term will be huge. That’s just not what we have seen for the most part. Why take the currency risk?”
ETF Trends: – Potential default risk in EM corporate bond ETFs. – The strengthening U.S. dollar could cause grief for the emerging markets and potentially increase default risks for USD-denominated emerging market corporate bond exchange traded funds.
24/7 Wall St: – The Best Investments of 2014. – Every year, new global trends emerge, old ones play out, and the financial markets adjust. This can offer new opportunities for investors to make money if their forecasts are accurate, their investments are timely, and they choose their assets well.
ValueWalk: – Fixed Income 2015: Handle with care. – With sustained improvement in economic growth, slowly rising inflation, and the approach of the Fed’s first interest rate hike, bond prices are likely to decline in 2015. High-yield bonds and bank loans can help investors manage this challenging bond market.
ETF Trends: – Broad market, fixed income ETF ideas for 2015. – With U.S. stocks continuing to soar and interest rates remaining low, encouraging investors to flock to longer-dated Treasury exchange traded funds, 2014 has been another year to remember for the ETF industry.
MarketWatch: – Gundlach, Liberman to launch DoubleLine long duration total return bond fund. – DoubleLine Capital expects to construct an investment portfolio for the Fund with a dollar-denominated average effective duration of at least 10 years.
Citywire Global: – Triple fund launch for Morgan Stanley IM. – Morgan Stanley Investment Management has launched a trio of new funds covering global growth, US equities and the US high yield bond market, Citywire Global has learned.
it won’t be USA banks or US junk bonds causing next crisis . Its going to be EU govts / banks stuffed with wildly overpriced sovereigns
— Dividend Master (@DividendMaster) December 9, 2014
Bonds are anticipating a recession next year like this, and a severe decline in 1st quarter.
— Michael A. Gayed,CFA (@pensionpartners) December 9, 2014
DoubleLine to launch long duration total return fund
— David Schawel (@DavidSchawel) December 9, 2014
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