It’s a Brave New World for bond investors, a more difficult environment than the easy money times of a few years ago, according to Rick Rieder, chief investment officer of global fixed income for money manager BlackRock.
The usual numbers don’t apply for today’s market, he said.
“I think the traditional metrics of where should growth and inflation be are not terribly relevant,” Rieder said at a BlackRock press briefing on Wednesday.
Interest rates will probably go up about twice over the next year, Rieder predicted, to 3.5 percent or 3.75 percent on the 10-year Treasury bond. But he said that these somewhat higher rates aren’t the biggest issues in the changing market. It is global liquidity levels.
“They’re coming down markedly and it is having a bigger impact than people give it credit for,” he said.
Liquidity is fast declining as the Federal Reserve has started reducing its balance sheet and the U.S. government, running huge deficits, is contributing to these liquidity changes. The Treasury Department is draining a trillion dollars a year in liquidity, he noted.
“Understanding the changing liquidity regime probably matters more for investors than headline events such as how many rate hikes the Fed implements,” Rieder said.
“Investors who underestimate the risks surrounding liquidity and who position too aggressively, or in too concentrated a manner, could run into trouble,” he warned.
Rieder said markets are volatile due to central banks pushing away from quantitative easing policies. They are looking to others to handle liquidity issues, he said.
This transition away from easy money, Rieder said, will likely succeed, but it is leading to greater volatility around the world. It is part of the reason why bond investors are spooked and sometimes sell.