BlackRock’s Rick Rieder on the Future of Fixed Income in a Post-QE World
When it comes to the European and U.S. debt crises are we nearing the dénouement — or still in the opening act?
At the Financial Analysts Seminar in Chicago earlier this week, Rick Rieder (pictured left), managing director and chief investment officer of fixed income at BlackRock, Inc., the world’s largest money manager ranked by assets, was unequivocal: both crises, unfortunately, are still in the early stages of their development, he told delegates.
With respect to Europe, Greece may be the most visible sign of deep structural problems across the old continent, which suffers from ongoing capital flow imbalances and burdensome debt levels. But it is Italy, Rieder asserted, whose near-term fortunes will be far more telling for the future of the European debt crisis as a whole: In the next three months (through October 2011), he noted, a nervous bond market must accommodate Italy’s need to roll over as much as $100 billion in debt.
On the other side of the Atlantic, said Rieder, who specializes in fundamental portfolios, the U.S. debt crisis reveals American banks to be far from healthy, given the large volume of bad loans and extensive exposure to troubled real estate assets. At the same time, the U.S. Federal Reserve’s policy actions have proved largely ineffectual, he argued, even as demographic shifts are impacting bond yields. Somewhat perversely, Rieder asserted, the Fed’s actions to stimulate growth by maintaining easy monetary policy are in fact stifling growth. That’s because easy money is weakening the U.S. dollar — and a weaker greenback is driving up the cost of commodities in U.S. dollar terms. Higher commodity costs, in turn, are sapping U.S. consumers spending and curbing economic activity.
The result is a paradox: The benefits of easy money, Rieder asserted, are offset by the impact of easy money. In Rieder’s words, “inflation is deflationary.”
As a result, contrary to many pundits’ predictions, investors should not expect significant inflation and higher interest rates over the next few years, he argued. In fact, a growing population of retirees in the U.S. suggests that demand for fixed-income instruments will grow substantially, helping tame yields. In Rieder’s view, this demand for bonds is substantially greater than the current supply and must be met before we see any appreciable rise in interest rates.