Rick Rieder of Black­rock says bond-fund in­vestors should be care­ful but not scared»

The Denver Post - - BUSINESS -

Ev­ery­where bond-fund in­vestors look, rea­sons to fear seem to be lurk­ing.

Af­ter decades of drop­ping in­ter­est rates led to strong and steady re­turns for bond funds, con­di­tions seem to be mass­ing in the op­po­site di­rec­tion. The Fed­eral Re­serve raised short-term rates last month, the third time it’s done so since De­cem­ber. It’s also plan­ning to pare the vast trove of bonds it built up to keep rates low fol­low­ing the fi­nan­cial cri­sis.

The Euro­pean Cen­tral Bank said a cou­ple weeks ago that it could trim stim­u­lus ef­forts if that re­gion’s econ­omy keeps strength­en­ing. That could send Euro­pean rates higher, lur­ing money back into Euro­pean bonds and out of Trea­surys.

Rick Rieder, chief in­vest­ment of­fi­cer of global fixed in­come at Black­rock, which man­ages $1.6 tril­lion in bonds, says the bond mar­ket is in­deed go­ing through a change. But he says the deep hunger for in­come, a re­sult of an ag­ing pop­u­la­tion look­ing to re­tire, should help keep the up­turn for rates mod­er­ate.

An­swers have been edited for length and clar­ity. Q : Many voices are call­ing this a big in­flec­tion point for the bond mar­ket. How mo­men­tous is this right now? A: I would agree that things are chang­ing, but I don’t think they’re mo­men­tous. Rates are go­ing to move mod­er­ately higher. There’s a de­mand for in­come in the world driven by de­mo­graph­ics that’s gen­er­a­tionally his­toric, and when­ever rates back up, you see this tremen­dous buy­ing come in (which in turn lessens the up­ward pres­sure on rates). Q : What about the Fed par­ing back its $4.5 tril­lion in bond in­vest­ments? A: They’re start­ing very, very slowly. But in the next two years, the pace is in­creas­ing at the same time that the fed­eral bor­row­ing level is chang­ing. Sup­ply and de­mand (for Trea­surys) come much more in bal­ance, which means rates can move higher.

Q : How much higher?

A: We think 2.50 per­cent to 2.75 per­cent for the 10-year Trea­sury this year. You can move to 3.25 per­cent next year. Q : In­fla­tion also has re­mained low for a long time now, and it sounds like you think it can stay that way for a while, which would mod­er­ate rising rates. A: What drove the volatil­ity in in­fla­tion over the last 25 to 30 years was en­ergy and oil. OPEC doesn’t drive the price any more.

Se­cond is hous­ing prices. You go back 20 or 30 years, and the Baby Boomers were driv­ing the en­vi­ron­ment for hous­ing prices, and you don’t see that now. Third, tech­nol­ogy is press­ing down on in­fla­tion. From ap­parel to trans­porta­tion, i.e. the Uber ef­fect, you’re cre­at­ing this un­be­liev­able pres­sure on po­ten­tial in­fla­tion.

In­fla­tion will go higher, but we’re go­ing to be in this range of in and around 2 per­cent in­fla­tion. Q : So what can in­vestors ex­pect from their bond funds? A: You still can gen­er­ate good fixed-in­come re­turns, but you have to do it dif­fer­ently than his­tor­i­cally. In the Black­rock Strate­gic In­come Op­por­tu­ni­ties fund, you still can do a pos­i­tive 4 to 5 to 6 per­cent re­turn, but you have to cap­ture some of these emerg­ing mar­kets to cre­ate more bal­ance, rather than hope the 10- or 30year Trea­sury will hold at these lev­els.

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