BlackRock Global Fixed Income Chief Investment Officer Rick Rieder is reducing his equity allocation and turning to highly rated bonds yielding 7% to 8%. Although he still expects stocks to deliver returns of 10% to 12%, he considers the income available in bonds more attractive at current levels. Rieder oversees about $2.4 trillion in assets, and his shift highlights how institutional investors are reassessing the relative appeal of stocks and bonds after the rise in US interest rates.
10-year Treasury yield rises above 5%
The US 10-year Treasury yield climbed above 5% this month for the first time since 2007. On September 26, the yield stood at 5.167%, while the 30-year Treasury yield reached 5.49%.
The 10-year yield affects the government’s borrowing costs and feeds through to mortgage rates, corporate financing and equity valuations. Its rise therefore improves the relative appeal of bonds while also increasing the cost of capital across other parts of the financial system.
The Federal Reserve raised its benchmark interest rate to a range of 3.75% to 4% on September 16, its first rate increase in more than three years. Rieder described the current environment as “not a crisis, but enough to be concerning.” He said higher inflation-adjusted interest rates, combined with slower growth in artificial intelligence, were putting pressure on most stocks. He remains positive on chip and memory companies, however, because of their order backlogs.
A shorter-duration approach to bond income
One income fund managed by Rieder currently yields 7.2% and carries an A- credit rating. Most of its bonds mature or reset their rates within three years, limiting price sensitivity if interest rates continue to rise. Rieder has also sold some mortgage-backed securities, which can decline when rates move higher.
The rise in Treasury yields has already pushed up the cost of housing finance, with mortgage rates reaching 7.45%. Rieder described the US housing market as “frozen,” showing how tighter financial conditions are affecting borrowing and housing demand beyond the bond market.
Higher rates add to government interest costs
Rieder believes the Fed should not continue raising rates, although he still expects one more increase. He said every 100-basis-point, or one-percentage-point, rise in interest rates could add $130 billion to $150 billion to the US government’s annual financing costs. With federal borrowing at a high level, the effect of rate changes on public spending is receiving increased attention.
Investors do not share a single view of what higher yields mean for markets. Tom Lee of Fundstrat said rising yields could benefit companies with stronger balance sheets. Rieder noted that when the 10-year Treasury yield has started at 5% in the past, bonds have produced an average return of about 9.5% over the following year.
He is not urging investors to move into bonds immediately. Economic growth remains firm, while war-related uncertainty and the scale of new government borrowing continue to complicate the outlook. Rieder is monitoring employment data for signs that US growth is beginning to slow. BlackRock’s real-time tracking puts the current growth rate at roughly 6.5% to 7%.
The competing forces of growth, inflation and Fed policy are keeping the rate outlook unsettled. Rieder’s allocation changes underline the income available in higher-yielding bonds while leaving the next move in rates dependent on forthcoming economic data and policy decisions.