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