BlackRock's Rieder Envisions Two Fed Rate Cuts This Year

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Bloomberg Apr 23 03:41 · 12k Views

BlackRock CIO of of global fixed income Rick Rieder says BlackRock has cut its own interest-rate exposure, weighting investments more to shorter maturities, and envisions the Fed being able to lower interest rates twice this year as inflation moderates in the months ahead. He speaks with Katie Greifeld, Tim Stenovec and Eric Balchunas on "ETF IQ."

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Transcript

  • 00:00 I don't need to tell you that it has been a crazy time in the bond market and you think about bank and how you've been structuring the portfolio.
  • 00:08 I mean, how has that changed As we've seen yields on feels like everywhere across the curve just really skyrocket over the past couple months.
  • 00:16 Thanks, Katie.
  • 00:16 Thanks for me on so.
  • 00:17 So a couple of things.
  • 00:18 First of all, we've brought down our interest rate exposure.
  • 00:21 We were running
  • 00:22 about 3/4 of a year longer than we are today.
  • 00:24 We're running as Eric said just over 2 years of interest rate exposure.
  • 00:28 We're keeping our interest rate exposure in the front to the belly of the yield curve.
  • 00:32 And the reason why I think we're a pretty close to flat for the year, the eggs down I think over 300 basis points.
  • 00:37 You know, it's just keep income, keep income and you don't need to go out the yield curve because the, you know it's all it's taken is volatility into the portfolio.
  • 00:44 So we're trying to do is keep our income high
  • 00:47 and you know, we're running almost, we use some of metric called horizon rate of return, which looks at what yield should you capture.
  • 00:53 It's almost 7%.
  • 00:54 So it's about almost exactly the basis point what it is in high yield,
  • 00:58 but we've been running about 2/3 of volatility because much higher rated implied rating is high triple B, almost single A,
  • 01:04 almost low single A.
  • 01:05 So
  • 01:06 the idea is diversify, keep a lot of income, don't take a lot of interest rate risk
  • 01:10 and you know just move it around.
  • 01:11 I mean, at some point this year, I think we're going to increase our interest rate exposure depending on the inflation day that we get.
  • 01:17 But
  • 01:18 for now, like, let's just clip coupon
  • 01:20 and just make it through what is a tough rate.
  • 01:22 Hey, Rick, you said move things around.
  • 01:24 So I'm just curious about how how nimble you are and in terms of how active of a role here.
  • 01:29 Are you talking like, you know, when you hear from Jay Powell last week with this idea of a rates reset, you're going in and you're changing asset allocation that day?
  • 01:37 Yeah, I mean, yeah, we
  • 01:39 it's definitely active.
  • 01:39 I mean, I think the beauty of this for calling for an investor going into it
  • 01:43 is we're trying to we're, you know, we're trying to manage our interest rate exposure.
  • 01:47 And if and if,
  • 01:48 if we think,
  • 01:49 you know, which I think will be the case this year, we're going to get to a place where the data, we anticipate the data improving.
  • 01:53 And I do think
  • 01:54 over the next month or so you're going to get better inflation data, will start extending our interest rate sensitivity.
  • 02:00 And then the big thing for us, you know, versus
  • 02:02 a straight high yield portfolio
  • 02:04 is move to where the opportunity is.
  • 02:06 Like for example, today we're running probably more European high yield than we've run historically.
  • 02:10 It's because the dollar investor you get an extra 100 and 5000 and 60 basis points of of
  • 02:15 what's called a crosscurrent additional yield for, for being a dollar investor.
  • 02:19 So it's just trying to tactically allocate, use securitize, use mortgages, keep your volatility down, keep the quality and liquidity of the portfolio up and it's up.
  • 02:27 And you know, fixed income is a pretty
  • 02:29 esoteric,
  • 02:31 you know, there's so many different assets you can utilize and just use the money as we can to try
  • 02:35 and keep our yield up.
  • 02:36 But but madness of volatility for people.
  • 02:38 Yeah.
  • 02:38 And Rick, I'm just looking at the portfolio.
  • 02:40 I did notice more securitized debt,
  • 02:42 the high yield it actually looks like has come down a little bit, But again, 37%
  • 02:46 is pretty significant.
  • 02:47 What are you picking within that bucket?
  • 02:51 It's a great question.
  • 02:51 So first of all, more Europe than I've run historically because of the because of the currency
  • 02:55 and and by the way, we're keeping our European high yield in the front short of the, you know, the two to five year part of the curve.
  • 03:01 You carry really well.
  • 03:02 We like we like the
  • 03:04 the carried of volatility there.
  • 03:05 And then, you know, in high yield,
  • 03:08 you know, the quite frankly, a lot of the high quality, high yields, not interesting the spreads you can get, you can get yields that are close and investment grade.
  • 03:14 It's not worth it.
  • 03:15 So the the the sweet spot today, high yields in the single B category and then triple CS you're talking about a lot of volatility introducing the portfolio.
  • 03:22 So what we're doing,
  • 03:23 cut the high quality US high yield, cut the cut the tail of the bottom off and then try and you know, use your use your investment teams to figure out in single B
  • 03:32 where's your sweet spot?
  • 03:34 So
  • 03:34 anyway, the idea of being tactical within the asset class, I think is pretty key for us.
  • 03:38 So that's the story on credit risk.
  • 03:40 I actually want to talk about duration risk a little bit more because you made the point that at some point you'll move out depending on the inflation data, you expect that it'll become, you know, a little bit better in upcoming prints.
  • 03:51 But how much of that decision on duration depends on when you think the first rate cut from the Fed will be and has that changed in the past month or so?
  • 04:02 That's a great question.
  • 04:03 Yes, they exactly that.
  • 04:04 I mean, they're
  • 04:06 listen, I think you're going to get to the place where, you know, this core PCE gets down to 2 1/2 to, you know, we're, we're running a little hot today, Dino, close to two and three quarters 280.
  • 04:16 So, you know, as you start to anticipate that, I still think the Fed would like to get a couple of cuts in this year.
  • 04:21 It's getting harder for them to do that, but I still think they can,
  • 04:24 once you get visibility on a couple of good inflation reports,
  • 04:29 employment, wages staying contained, then you can start to extend your duration.
  • 04:33 I mean, the thing that's key today, it's like why, why?
  • 04:36 You know, why mess with it?
  • 04:37 Just keep your income high, keep your interest rate exposure down.
  • 04:40 But it's going to be a big tool like it can you throw off, you know, with a portfolio throwing high
  • 04:45 sixes type of yield,
  • 04:47 you know, can you start to get some interest rate exposure, maybe get you some higher total return from that?
  • 04:52 So
  • 04:52 listen, I think we're going to get there.
  • 04:54 But
  • 04:55 you know, that being said,
  • 04:56 you know, the service level inflation in this economy is too hot
  • 04:59 and we.
  • 05:00 You know, hopefully it'll come down over the next couple of weeks.
  • 05:02 Well, what makes you, I mean,
  • 05:04 hopefully, I think a lot of people are saying hopefully, Rick, but what makes you confident that over the next month or two, as you said, we're going to start getting better inflation data.
  • 05:10 What are you seeing out there in just about a minute?
  • 05:13 Yeah.
  • 05:13 So
  • 05:15 listen, I mean, there's some things that have created exogenous, you know, auto insurance, health insurance, shelter comes down with a lag.
  • 05:20 I think shelter will start to come down.
  • 05:22 So, you know, you take some of these that have been running at extremely high levels.
  • 05:27 My sense is they'll start to come.
  • 05:28 Healthcare inflation will start to come down.
  • 05:31 But you got to see it to your point, you got to see it.
  • 05:33 I think you will.
  • 05:34 But
  • 05:35 in in the interim it's like
  • 05:36 just click coupon and and life is good.