The U.S. economy is more resilient than many think, giving equities room to rise further while benchmark Treasury yields will likely lift to over 1.25% next year, said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income.
U.S. government stimulus and Federal Reserve monetary policy are helping cushion the economy from the slump during COVID-19 and businesses operating virtually have posted productivity gains, Rieder said at the Reuters Summit. U.S. economic growth rebounded in the third quarter as more than $3 trillion in government COVID-19 relief helped millions of unemployed people cover expenses.
“I try not to be too Pollyanna-ish,” said Rieder, who is also Head of BlackRock’s Global Allocation Investment Team. “You still have the risks, but when I go through the math and read the economic reports, I’m... confident ... that the economy will be supportive for markets for some time.”
While some assets have priced in a strong economy such as agency mortgages and parts of the investment grade market, the U.S. equity market still has some upside, said Rieder. BlackRock manages $2.5 trillion in fixed income assets. Agency mortgage backed securities are guaranteed by Fannie Mae, Freddie Mac or the Government National Mortgage Association, or Ginnie Mae.
He sees potential for gains in parts of tech, consumer, cyclical areas such as industrials, as well as housing and some leisure sectors, with the expectation of a vaccine expected to boost service sectors.
While U.S. equities have been scaling fresh highs, longer-duration bond yields have been rising from record lows, along with inflation expectations, on expectations of extra stimulus.
The Fed’s aggressive action to prop up the economy has kept yields historically low, and Rieder said the traditional 60/40 stocks-bonds allocation was over in terms of U.S. Treasury allocations, with investors now thinking about fixed income “completely differently” to pre-pandemic.
“Why would anyone own Treasuries other than as a cash surrogate in the zero-to-five year part of the curve?” Rieder said. “The Fed has made them uninvestible assets.”
Owning fixed income outside the United States is an “attractive way to go” with the yield on emerging market debt still attractive, he said.
Rieder does not expect inflation to rise strongly, although he likes Treasury Inflation-Protected Securities (TIPS) to protect against the prospect of a modest rise.
“You hear some crazy stories about how inflation is going to burst higher but it’s just not,” he said. Rieder thinks benchmark 10-year Treasury yields next year will go over 1.25% but the Fed will push back from yields moving much higher.
With a Fed meeting coming in mid December, Rieder pointed to things the U.S. central bank can do in coming months to keep yields from moving significantly higher such as increasing bond purchases and lengthening the maturity of the Treasuries they buy to increase purchases longer than five years.
While vaccine and stimulus expectations have boosted equities and lifted inflation expectations, they have contributed to a slide in the dollar.
Rieder thinks the dollar will “cheapen from here,” but “doomsayers that say it is all over for the dollar have to put some perspective.”