As the economy shifts from monetary to fiscal policy, BlackRock’s fixed-income team predict that advisors can expect 10-year Treasury rates to rise, central banks to increase rates and tax reform to have no impact on the global investment management firm’s portfolio positions.

“The 10-year Treasury will rise 2.50 to 2.75 this year,” said Rick Rieder, chief investment officer of global fixed income with BlackRock. “If interest rates rise 50 basis points on 10 year Treasurys, it will take 12 years to make the money back because they're unbelievably interest rate sensitive.”

Rieder advises investors to explore less interest-rate sensitive investments that provide a lot of yield. Less interest rate sensitive assets include mortgages, non-agency mortgages, commercial mortgages and collateralized loan obligations.

“We like going global and think investors should take more interest-rate risk abroad,” said Rieder, who was flanked by Jeffrey Rosenberg, chief investment strategist, and Peter Hayes, head of municipal bonds, at BlackRock’s East 52nd street corporate headquarters in Manhattan on October 5. “We've been buying European banks and U.S. banks quite a bit, but we haven't done anything in Puerto Rico.”

Although 2017 started with Mexico under fire of NAFTA renegotiations, a constitutional referendum in Turkey and allegations of corruption at the highest levels in Brazil, Sergio Trigo Paz, head of emerging markets fixed-income portfolio management, said local markets are still the place to be in sub-asset classes.

“We like oil exporters,” said Paz, who appeared at the BlackRock press conference by video. “Nigeria, Russia, Colombia and Kazakhstan, and in some countries such as Nigeria we're even investing in local markets. We are moving in to some countries deeper because we feel that the macro-environment is much more stable than it was and likely to improve going forward.”

Because consumption is good, Rieder expects central banks to raise rates while the European Central Bank (ECB) will slow its asset purchase program known as quantitative easing.

“We think the ECB will announce this month that they will start tapering down the program starting in January,” Rieder told a group of some 15 journalists. “The Bank of Canada has done it and we think Bank of Australia will start doing it.”

 

BlackRock is not positioning portfolios today for any potential change in tax reforms.

“With what we know of the most recent proposals, the good news is it won’t be a big impact on the market,” said Hayes. “Even if marginal rates fall for corporations, it’s not like it will impact the market, which is already pricing in lower marginal rates particularly post-election. The municipal market derives a lot of its value from where tax rates are. What could happen at a lower rate is that they let those muni positions roll off and the reinvestment then takes place in higher-quality credit.”

Another noticeable trend, according to the panelists, is banks buying a rising amount of mortgages. Also, pension funds and insurance companies are increasing demand for fixed income.

“The technicals in fixed income are like nothing I've ever seen before and the demand for income is not going away,” Rieder said. “That doesn't mean spreads can't widen for a couple of months, but if you take a supply and demand of fixed income, the demand for pension funds and insurance companies is extraordinary.”

As for the pension problem in the U.S., Hayes said BlackRock’s view on general obligation bonds compared to revenue bonds changed well before Puerto Rico’s crisis.

“To some degree it started with Detroit,” said Hayes. “We do think that the pension problem in the United States is just not being addressed.  The difficulty with general obligation bonds is that there are different types of general obligation debts.”

Detroit filed for bankruptcy in 2013 and is struggling to meet its pension obligation,

Pension models of the past were built on factors that have changed, according to Hayes. Those factors include life expectancy, discount rates and the number of people paying in compared to those receiving.

“Nobody's changed the output,” said Hayes. “Until those change, I think the pension issue will continue to overhang the market, specifically in Puerto Rico.”

Puerto Rico was beginning to undergo debt restructuring before Hurricane Maria hit on Sept. 20.

“Post-hurricane bond prices have dropped quite a bit,” said Hayes. “Pre hurricane, it was about how to jump start Puerto Rico’s economy. When the hurricane hit, it changed the story from one about economic debt restructuring to a humanitarian crisis and getting basic services up to speed.”