“When Italian bonds sold last spring after the new populist government was formed, the spike in yields reflected reduced market liquidity as well as structural problems like Italy’s high sovereign debt load and budget difficulties,” Rieder said.
And, in this environment, bond investors are showing little loyalty, he said. He recommended that bond investors diversify and avoid concentrating on long-term bonds. Bond investors should also realize that, with the end of quantitative easing policies, yield, not price, is the more important factor.
Investors, Rieder and his BlackRock colleagues said, should hedge duration risks and consider a barbell curve strategy. This kind of approach emphasizes the short and the long end as opposed to the overweighting of the belly of the yield curve. The latter, they warned, will be where investors could be hurt as central banks move to more normal rates.
James Keenan, Black Rock chief investment officer and global co-head of credit, said bond investing now requires other changes.
“Rising rates lead us to prefer floating-rate assets—leveraged loans and CLOs. We’re not the only ones interested in these assets. Investor interest has been strong,” he said. He noted that these kinds of investments have done well in a climate of gradually rising interests, which is what BlackRock officials expect.