BlackRock’s Rick Rieder says shorter term U.S. bonds are offering attractive yields as markets broadly move away from risk assets.
Rieder, the chief investment officer of Global Fixed Income for BlackRock, said in an interview with BNN Bloomberg Tuesday that market sentiment moved from “animal spirts” earlier this year into “animals in hibernation” as risk appetites broadly flipped.
“So, it started the year (with) tremendous flows into high yield loan markets and that’s reversed and now its people looking for being more cautious, front end of the yield curve, short term bonds. Now that changes, but today it’s definitely been more short end, a bit more high quality and staying a bit cautious for the time being,” he said.
Rieder’s comments come amid gains in short-term U.S. Treasury yields on Tuesday, according to Bloomberg News, with U.S. two-year yields rising as much as five basis points to 3.81 per cent. Meanwhile, longer term Treasury yields declined, partly offsetting a yield curve steepening that occurred Monday.
As some global investors’ move away from U.S. assets there have been calls that U.S. exceptionalism is being challenged amid U.S. President Donald Trump’s trade war.
Given the current circumstances, Rieder said the U.S. is “going through some challenges today.”
“The amount of debt in the United States is too big. We’ve got to bring these deficits down. We’ve got to get spending down. So, there is some concern about rates moving higher,” he said.
“That being said, part of what’s super exciting about the bond market today is if you’re staying in the front end of the yield curve, or the belly of the yield curve, these yields are very attractive and buying things like floating rate in securitized assets, these yields are very attractive.”
Ross Mayfield, an investment strategy analyst at Baird, said in an interview with BNN Bloomberg Tuesday that the dominant narrative surrounding the “sell America trade” is a “bit overstated.” He noted that European and other international assets were trading at significant valuation discounts and just needed a catalyst for some rotation to occur.
“I still think (the U.S.) Treasury should be viewed as the risk-free asset. The U.S. is still a very attractive place for capital, both in the bond market and the and the equity market,” Mayfield said.
“It’s still a place where a lot of innovation and AI is happening. So, I think that once the trade war and trade rhetoric settle down, maybe the administration starts focusing on tax cuts instead, we’ll settle into a place where the U.S. is still kind of the dominant vacuum for global capital. Maybe just a little bit less so than it was two or three years ago.”
‘Fed independence’
However, Mayfield noted the “sell America trade” is being exacerbated by repeated attempts at politicizing the U.S. Federal Reserve and exerting influence over the central bank, which is weighing on the U.S. dollar and pushing bond yields higher.
On Monday, Bloomberg News reported Trump said the U.S. economy may slow if the Fed did not act to immediately cut interest rates, marking the latest criticism of Fed Chairman Jerome Powell with Trump suggesting he could be removed before the end of his term.
“I think the irony is this sort of activity only kind of weakens the hand of the executive branch and pushes yields up and makes it less likely that the Fed cuts. So, it’s kind of the self-reinforcing cycle that doesn’t really get you where you want to be. I think it’s a big concern though, and I think it’s something that investors need to and are pricing into equities and fixed income,” Mayfield said.
If Powell were to be removed from his position, Mayfield said there would likely be a “big sell-off in stocks and bods.”
“I think you’d continue to see pressure on the dollar, and that’s one of the things where I’m not necessarily sure you could put the toothpaste back in the tube if they were to execute a move like that,” Mayfield said.
“Even if it were reversed in higher courts, once the sanctity or the trust that Fed independence and central bank independence is built on top of is eroded, I think it’s hard to get it back.”
