BlackRock’s Rick Rieder said interest rates are running up faster than he expected, but ultimately the return of more normal volatility is healthier for markets.
Rieder said his view on where the 10-year yield is going has not changed, even with the quick move higher. “I think we’re going to 3 percent, low 3s. … I’m surprised about how fast we’re getting there,” he said.
The 10-year yield was as high as 2.88 percent Thursday but retreated to 2.81 percent when stocks sold off sharply in reaction. The 10-year was back up to 2.85 percent in afternoon trading.
“We’ve been in this period of a bit of a la-la land of extraordinary monetary stimulus, no volatility, creating distortions,” said Rieder, who is BlackRock’s global chief investment officer of fixed income.
“We live in a world where … risk assets like equities can do well while Treasurys do well, but when you go the other way, you have this dynamic. Treasurys can move higher in yield at the same time the market goes down,” said Rieder.
Global central banks are moving to reverse some of that easing. The European Central Bank has cut its quantitative easing in half, and the Bank of England just on Thursday signaled it could raise interest rates sooner and faster than expected.
Treasury yields moved higher Thursday on the Bank of England news, but also on a bipartisan spending bill that widens the U.S. deficit at a time when the Treasury is increasing its issuance.
“I do think it argues real rates are too low for a long time, and you should get to the low 3s. … I look at free cash flow and as the cost of financing goes higher, equity valuations go lower,” he said. “There’s a tremendous demand argument when you get to the low 3s and maybe you get to 3.50. I don’t think you’re going to go much higher than that. There’s this tremendous demand from insurance companies, pensions that need yield.”