Rick Rieder, BlackRock's chief investment officer for global fixed income, believes that longer-dated corporate bonds present a compelling investment opportunity due to their solid yields and undervaluation. He has begun incorporating these bonds into his iShares Flexible Income Active ETF (BINC). Rieder highlights the attractive valuations in the 20-40 year maturity range and the potential for locking in yields at 5% to 6%. He discusses the factors influencing bond markets, including interest rate sensitivity, inflation expectations, and the limited supply of longer-dated assets. Rieder also delves into the ETF's overall investment strategy, emphasizing a focus on high-quality assets with limited interest rate risk, including high-yield bonds, loans, and securitized products.
There's a wealth of income opportunity in the bond market today, but according to Rick Rieder, BlackRock's chief investment officer for global fixed income, longer-dated corporate bonds offer not only solid yields but are also undervalued. Rieder recently started incorporating longer-dated corporates into his iShares Flexible Income Active ETF (BINC), which manages $7.69 billion in assets and boasts a 30-day SEC yield of 5.57% with a net expense ratio of 0.4%.
Overall, spreads have been tight on investment-grade corporates, making them relatively expensive. Spreads, which measure the difference in yield between Treasurys and other fixed-income assets of the same maturity, tell a different story when looking at longer maturities, around 20 to 40 years. 'They trade at 60, 70, 80 cents on the dollar,' Rieder said in an interview with CNBC. 'That's a good asset. Investment-grade companies don't default.' He's also locking in yields at around 5% to 6%.Longer-dated corporates have been depressed because they are more sensitive to interest rate movements. With the January consumer price index reading exceeding expectations and the Federal Reserve Chair Jerome Powell testifying before Congress that the central bank is 'not quite there yet' in bringing inflation down to its 2% target, the market anticipates no change in interest rates at the upcoming March meeting. The supply of bonds, particularly longer-dated assets, is relatively limited, though demand still exists. 'Companies would rather issue shorter on the yield curve, as opposed to paying up. And pensions, life insurance companies need long bonds,' he said. Some of BINC's longer-dated investment-grade holdings include bonds from Amazon and Apple, according to the fund's website. However, longer-dated investment-grade corporates still represent only a small portion of Rieder's fund, and overall, investment-grade debt comprises 12.6% of the fund. Only 3.6% of that is in U.S. credit. Instead, the ETF focuses on what Rieder calls good quality assets in Europe and the U.S. that don't take on a lot of long-term interest rate risk. 'Good, but not great,' he stressed. 'Great trades too rich.' BINC primarily focuses on debt with a maturity of 0 to 5 years, with Rieder calling two and three years the 'sweet spot.' High-yield bonds and loans constitute nearly 41% of BINC, with approximately 18% in European and British assets and 23% in U.S. assets. Rieder favors BB-rated high yield in the former and B-rated in the latter. He believes Europe's economy will grow slowly enough for the European Central Bank to remain accommodative. He added that Europe's high-yield market is small and companies have good credit quality.The second-largest allocation is in securitized products at just under 37%. Collateralized loan obligations make up 11%, commercial mortgage-backed securities sit at 10%, non-agency MBS comprise about 10%, and asset-backed securities make up 5.5%. 'The market just hasn't developed enough that you're still able to buy even triple As at still very attractive levels,' Rieder said. Meanwhile, the CMBS market has been weighed down by concerns about office real estate. 'The truth is, things like lodging, class A office that's fully leased up is attractive,' Rieder said. 'You're getting paid for taking a little bit of risk in an area where people feel like there was some pressure.
INVESTMENT BONDS CORPORATE BONDS FIXED INCOME INTEREST RATES INFLATION ETF BLACKROCK RICK RIEDER HIGH-YIELD BONDS SECURITIZED PRODUCTS
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