BlackRock’s Rick Rieder says take advantage of this golden age for fixed income as Fed is likely to cut rates

Published Mon, Sep 16 202412:23 PM EDTUpdated Mon, Sep 16 20245:07 PM EDT

Key Points

With the Federal Reserve expected to begin its rate-cutting cycle this week, investors should take advantage of this "golden age of fixed income" now, according to BlackRock's Rick Rieder.
Traders are split between expecting a quarter-point decrease and a half-point cut when the Fed meets this week, with a heavier weighting toward a bigger cut, according to the CME Group FedWatch Tool.

With the Federal Reserve expected to begin its rate-cutting cycle this week, investors should take advantage of this "golden age of fixed income" now, according to BlackRock's Rick Rieder. He sees a shift coming in the market. "The world is changing," said Rieder, the asset manager's global chief investment officer of fixed income. "The equity market will continue to do, I think, OK, but no better than OK." Plus, as investors question the large multiples on tech stocks, the "fever pitch" that the names have enjoyed will not be sustained, he said, although he believes they will continue to do well. Investors instead should buy yield "and just watch it do its thing," he said. BlackRock manages more than $9 trillion. "The idea of, 'Gosh, I can lock in for three to five years — and you don't have to go out to 30 years — I can lock in these yields for the next three to five years.' I think it's a pretty compelling proposition," said Rieder, who manages the BlackRock Flexible Income ETF (BINC). The fund has a 5.84% 30-day SEC yield and net expense ratio of 0.4%. BINC YTD mountain BlackRock Flexible Income ETF year-to-date performance Traders are split between expecting a quarter-point decrease and a half-point cut when the Fed meets this week, with a heavier weighting toward a bigger cut, according to the CME Group FedWatch Tool . Rieder is in the camp expecting the quarter-point decrease, although he personally believes the central bank should cut by a half point. In this environment, Rieder likes the belly of the curve and assets such as securitized products , high yield and European credit. BINC currently has about 28% of its assets in non-U.S. credit and about 20% in U.S. high-yield bonds. Nearly 13% is in agency residential mortgage-backed securities and about 11% is in collateralized loan obligations . Rieder is not concerned about the narrow spreads in high-yield credit. "High-yield companies should be borrowing 200 basis points richer than they're borrowing today," he said. "The only reason they are borrowing at these levels is because people think spreads are too tight, because the Fed is behind the curve." At the same time, there is not much supply coming onto the market and fundamentals are in great shape, he said. "We've got a chance to buy companies that are arguably in the best shape they've been, in aggregate credit-quality wise … in two decades," Rieder said. "They're borrowing at significantly cheaper levels, meaning we get to invest in them at cheaper levels." Still, he believes investors need to be precise in how they own high yield these days because there is a wide dispersion in the space. With a lot of money flowing into high-yield bonds and limited supply, some areas have gotten too rich and are not worth owning, such as some of the BB-rated bonds, he noted. Meanwhile, CCC bonds "are an adventure in and of themselves," he said. Therefore, Rieder would buy BB credit in Europe and B-rated bonds in the U.S. Then he would marry that high yield with assets such as agency mortgage-backed securities and AAA-rated CLOs. With agency MBS, rate volatility is coming down and liquidity is tremendous, he said. "We like low coupon agency mortgages," Rieder said. "The prepayment risk is very, very low." While AAA-rated CLOs may not be as liquid as agency MBS, they are a bargain, Rieder said. "There are AAA CLOs — floating rate, super high quality — and you're getting 5.5% to 6% yield for a AAA asset," he said. "It's the cheapest asset in all of fixed income."