Bond investors have long fretted that there’s a “bond bubble.” As the thinking goes, interest rates will rise when the Fed stops its easy money policy and then bonds will collapse and go “ka-plooey.”
But fixed-income managers at BlackRock have a different take: Don’t take the bond crash hype too seriously.
BlackRock’s Rick Rieder, co-head of fixed income in the Americas, spoke at a roundtable discussion sponsored by the firm in Midtown Manhattan last week. Rieder said there are deeper structural reasons that people will continue to want bonds. And these demands outweigh the “bubble” fear. Indeed, BlackRock believes interest rates will remain low for a long, long time.
“When people talk about rates [being] low and there is a bond bubble and rates are going to revert back to where they have historically been, we vehemently disagree with that,” Rieder said.
For one thing, there’s a historic aging of the population in the developed world, he said. That means more people will be drawing from the economy than contributing to it, which means growth will continue to be sluggish. That, in turn, means more people need income streams to sustain their standard of living. At the same time, the developed world is delevering—so less new debt will be created. Because so many people will continue to need bonds to match their liabilities, the demand for them will outstrip the supply. “A bubble [suggests] there’s too much supply relative to demand. We actually have the exact inverse. There’s too much demand relative to supply.”
Nor will the Fed’s money printing have an effect, he said, pointing to the muted effect of the current sequester—a slate of mandatory government budget cuts.
“The sequester is $85 billion over a series of months and it’s really only $44 billion of true cuts over a series of months, so it’s about 0.3% of GDP,” Rieder said. “The Fed is putting the exact same number, $85 billion, in every single month indefinitely, what works out to about 6% of GDP a year.
“The implications for fixed income are profound when you have that much liquidity in the system,” he added.
BlackRock’s attitude is that if interest rates are going to remain low, the short cycles become more interesting for investors. That’s where people will need to make their fixed income money: in short-cycle, tactical plays.
“The way you make money today in fixed income today is to follow the money,” Rieder said. “I.e., you have to follow where monetary policy is changing.”