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.