Finding value in today's bond market is a lot different from years past, says Rick Rieder, BlackRock's global chief investment officer of fixed income.
Selling volatility and reducing credit quality don't work because spreads are too tight and moving out on the yield curve doesn't make sense when rates are rising. The 30-year Treasury bond, for example, is down 4% year to date.
"You have to run less risk today," says Rieder, who spoke at a breakfast meeting with reporters. But unlike other strategists, Rieder isn't cautious primarily because of expectations for rising inflation and consequently rising rates.
"Inflation won't rise that much," says Rieder, who expects core CPI will peak at 2.5% and the core personal consumption expenditures index — the Federal Reserve's favorite inflation gauge — slightly higher than 2%. Most job creation is occurring in the service economy, which doesn't have the same multiplier effect as job creation in goods-producing sectors, and business spending on software tends to limit price increases, reasons Rieder.
Rather than inflation, It's the flood of new Treasury debt to fund a $1 trillion-plus U.S. deficit that worries Rieder. The deficit is expected to explode as a result of the recent tax cut bill.
"Net issuance of Treasury debt net will be unbelievable," says Rieder.
Given this outlook, Rieder favors two-year Treasuries, whose rates near 2.3% are well above the dividend yield of the S&P 500, at 1.87%. "You get income for two years and don't have to take credit risk or equity risk."
