- Rick Rieder, who oversees $1.8 trillion as chief investment officer of fixed income at BlackRock, tells Business Insider what he views as the "story of the year" in markets.
- It stems from what he sees as a shift in the yield curve, and Rieder says it will result in big opportunities for investors.
As stock market volatility roars back and Treasury yields climb to their highest level in four years, it would seem a major shift in markets is afoot.
For lovers of the status quo, this may seem like an unwelcome development. But for investors who have grown sick of chasing yield in the same assets for the past several years, it's a major blessing.
Rick Rieder, the global chief investment officer of fixed income at BlackRock, thinks this is the story of 2018. In an interview with Business Insider, Rieder - who's responsible for overseeing $1.8 trillion - shed light on the grinding gears of the market, discussed how the environment as we know it is changing, and outlined the opportunities that are coming available.
It was part of a wide-ranging discussion that also included a deep dive into Rieder's economic outlook, which features an intriguing analogy and relies heavily on the habits of millennials. You can read that story here.
This interview has been edited for clarity and length.
Joe Ciolli: What's your take on the future of the stocks vs. bonds relationship? Do you see a change occurring there?
Rick Rieder: The story of the year is the front end of the yield curve. It's pretty incredible where we were the last few years, compared to where we are now.
The front end of the yield curve did not give you a lot of carry or income when the system was starved for it. As a result, money went into high-yield, equities, short-volatility - anywhere there was income. When you lift the front end of the yield curve, your need to stretch for income in riskier assets is reduced. When the Fed is raising short-end interest rates, that gives you tremendous investment alternatives, without taking a lot of risk. I think that's a really big deal.
(Note: Rieder provided the chart below, which shows that the yield of 2-year Treasurys is now about 44 basis points above the dividend yield on the S&P 500. He argues the front end of the yield curve is more attractive than long-term rates, and may be more attractive than stocks.)
"The story of 2018 is the renewed ability to get income into portfolios without stretching to take risk," said Rieder.
Ciolli: What kind of effect will this have on stocks as cross-asset competition increases? What about volatility?
Rieder: I still think equities are going to go higher, but the path is going to be much more jagged and healthy than the last couple of years. You can short volatility when you know central banks have your back. It's a much more dangerous paradigm when you don't. A lot of the short-volatility positions getting cleared out will help the market stabilize and get better.
We also think that moving away from this monetary policy-induced extraordinary accommodation - otherwise known as the central bank put - is going to move volatility back up to more normal levels. We'd gotten used to an extreme.
Ciolli: So how is that going to impact what people are watching in markets, specifically Treasury yields, which have been under so much scrutiny lately?
Rieder: Going forward, I think people are focused on the 10-year, and the front end of the yield curve. As you get to the second half of this year, I think we'll be in a range on the 10-year. Inflation is moving moderately higher that'll push us back to the low 3s, maybe 3.25%.
Ciolli: All of this talk of inflation and Treasury yields leads back to the Federal Reserve, and its plan for how quickly to raise interest rates. What's your take on the Fed right now?
Rieder: The Fed and monetary policy have been the story of the past few years. The variance on when and how they move is going to be based on whether data allows them to. The Fed is very relaxed about the pace at which they're willing to move.
We're front-loading a tremendous amount of growth, particularly when it comes to wages, which should make for a strong 2018 and 2019. That will allow the Fed to be a bit more tolerant of inflation slightly above 2%, because the economy could slow and essentially bring you back to where you were.