BlackRock’s Rick Rieder said investors should take advantage of this “golden era of fixed income” now as the Federal Reserve is expected to begin its rate-cutting cycle this week. He sees the market shifting. “The world is changing,” said Reid, the asset manager’s global chief investment officer for fixed income. “I think the stock market will continue to do well, but it won’t be better than okay.” In addition, he said, as investors question the high price-to-earnings ratios of technology stocks, the “mania” enjoyed by these companies will not last. Although he believes they will continue to perform well. Investors should buy yield “and then watch it play out,” he said. BlackRock manages more than $9 trillion. “The idea is, ‘Gosh, I can lock in three to five years — and you don’t have to lock in 30 years — I can lock in these yields for the next three to five years.’ I think that’s a very compelling proposal,” said Rieder, who manages the BlackRock Flexible Income ETF (BINC). The fund has a 30-day SEC yield of 5.84% and a net expense ratio of 0.4%. Year-to-date performance of the BINC YTD mountain BlackRock Flexible Income ETF Traders are betting on whether a quarter-percentage point cut or a half-percentage point cut when the Federal Reserve meets this week, with greater preference being given, according to data from CME Group The Fed’s monitoring tool for rate cuts. Rieder expects a quarter-percentage point cut, although he personally believes the central bank should cut rates by half a percentage point. In this environment, Reid likes the belly of the curve and assets such as securitized products, high yield and European credit. About 28% of BINC’s assets are currently in non-U.S. credit and about 20% in U.S. high-yield bonds. Nearly 13% are agency residential mortgage-backed securities and about 11% are collateralized loan obligations. Reed isn’t worried about the tight spreads on high-yield credit. “High-yield companies should be borrowing 200 basis points higher than they are now,” he said. “The only reason they’re borrowing at these levels is people think spreads are too tight because the Fed is behind the curve.” Meanwhile, he said, There is not much supply on the market and the fundamentals are in good shape. “We have an opportunity to buy companies that are arguably in the best shape in terms of overall credit quality in two decades,” Reed said. “Their borrowing levels are much lower, which means we can invest in them at cheaper levels. ” Still, he believes investors now need to understand exactly how to own high yields because there is so much fragmentation in the space. He noted that with large inflows into high-yield bonds and limited supply, some areas have become too rich to be worth owning — such as some BB-rated bonds. Meanwhile, CCC bonds “are an adventure in themselves,” he said. So Rieder will buy European BB credits and U.S. B-rated bonds, then combine high yield with assets like agency mortgage-backed securities and AAA-rated CLOs. He said that through agency MBS, interest rate volatility is declining and liquidity is huge. “We like the low interest rates on agency mortgages,” Reed said. “The risk of prepayment is very, very low.” Rieder said that while AAA CLOs may not be as liquid as agency MBS, they are cheap. “There are AAA CLOs — floating rate, super high quality — AAA assets that are yielding 5.5% to 6%,” he said. “It’s the cheapest asset in all of fixed income.”
