Fed taper is ‘insignificant’ to the markets: BlackRock’s Rieder

Yahoo Finance’s Julie Hyman and Brian Sozzi discuss the Fed’s taper timeline, market outlook, the future of Bitcoin, and more with Rick Rieder, Blackrock CIO of Global Fixed Income.

Video Transcript

JULIE HYMAN: We are going to delve into the fixed income world and whether we are seeing some of the same caution that is being expressed elsewhere in fixed income as well. For that we bring in Rick Rieder, he is the chief investment officer of Global fixed Income at BlackRock. Rick, it is always great to catch up with you. We've been talking a lot this morning, about how we've been seeing equity strategists cut their S&P500 forecasts. And there does seem to be a bit of a shift in tone and sentiment coming from strategists more broadly. On the fixed income side, how are you feeling? I mean, we do see kind of fixed income markets take tapering experts expectations in stride up till now?

RICK RIEDER: So I mean-- Thanks for having me, so-- so it's a couple of things. So I run around large equity portfolios as well. So and the dichotomy between the two is pretty extraordinary. I mean, I would say first thing, it was I was a fixed income market taking you know tapering or I mean, it is to say in stride is an understatement. The amount of supply that's coming to market in-- in investment grade credit last week $75 billion is for days. By the way, were Jewish holidays in there as well, the price of that much high yield, the loan market is pricing immense amounts of supply, the Treasury market the Treasury funding.

Markets are having no problem with the Fed taper. In fact, the Fed taper and the discussion of the fight is so insignificant. We're talking about $15 billion a month. We got $75 billion of riskier investment grade supplied for days, it's just not-- you know, people don't put the sheer size of it. You know, particularly, when a Fed is delinking rate from the quantitative easing program, it's just the markets are in good shape. The demand for income, the demand for return.

I've been doing this 35 years, I've never seen the extraordinary amount of demand there. So by the way, I do run big equity funds. I actually think, the equity market I think, I haven't read this Goldman piece you were referring to, but you look at what revenue growth is, you look at what these companies are building book equity at 20-25%, 30% per annum. And you think about that gosh, my-- the intrinsic value of my stock is going up 20-25% per annum. Whereas, the 10 year T note yields 1% with real rates at negative 1%. It just puts in a perspective the paradox between value and the fixed income market, and the equity market today where I don't think equities are high by any measure.

JULIE HYMAN: So Rick, what accounts for all of this demand that you're talking about? I mean, is it people like to point the finger at the Fed of course, and say, Oh, it's because of all the liquidity in the system, and it needs a place to go. Is that what's going on here? Is there something more to it? It seems like that seems overly simple. I don't know.

RICK RIEDER: So I mean, the Fed is the no doubt. I mean, in fact, I think, the Fed is creating an overcrowding dynamic. Particularly, in the front end of the yield curve there's not enough collateral to fulfill the amount of that the Fed has to put into the system. So I do think the Fed is-- is over enhancing, the amount of liquidity in the system. But it's so much bigger than that going through a demographic evolution and a need for income. And by that is extraordinary pension funds, insurance companies. By the way, not just domestically, you look at Japan, you look at other parts of the world that have a need for yielding assets, we don't have the inflation rates we have here that amount of money.

And by the way, as the equity market runs up people look at balancing their portfolio and say, gosh, you know, my equity just became a bigger portion of my portfolio. I need to reduce that and I got to buy more fixed income. So the demand for yield and income, and by the way, this is not a temporary one that's part of why I would argue. The Fed tapering would have more than an insignificant effect on this in the near term because particularly, since the system is overstuffed with liquidity.

But the demand for income is going to be something that is going to be the hallmark of this investment decade without question, to me. I mean, it's just-- I mean, when you look at the sheer size of wealth that's been created. And we look at by the way, the consumer today, I think, growth is better than the forward growth that we've had in the people think. Consumer has not only built up huge amounts of savings relative to history, but it's also paid down their debt, and their house is in much better shape than it's been before. So consumers in great shape, the need for savings and expenditure will be strong from here.

BRIAN SOZZI: Rick, why do you think-- just looking at the equity component, why do you think investors are ignoring some of these correction calls we've gotten lately?

RICK RIEDER: So first of all, it's too much money. I mean, the-- the amount of not only is there too much money the alternative is not attractive at all. And so, what's happening and by the way, much of the way we're running our big unconstrained portfolios is gosh, I don't want to own a lot of those quality assets that the Fed is putting at rates prices that don't-- don't make sense. So they hold more cash, but then you can get more equity-- more equity upside. But also, I think, there's something historic that we're going through when you talk about these companies building booked equity, as fast as they are. And you look at the earnings yield of the equity market or the free cash flow yield, even-- even what I think. I'm, -- I think, coming from a credit side, I like free cash flow yield better than anything.

I mean, we're seeing more and more companies throw off for-- you know, the average of the index's over 4% earnings yield just above 4% free cash flow yield. Those numbers are incredible. And when you could build book equity, as fast as you can. And then you think, OK, so what's my fundamental backdrop? You know, people look at prices. They actually write records and I always find, like a record, but if you're building book equity that fast, and you're throwing up that much earnings yield, these multiples are not high at all. There are some stocks that are too high. But the-- the overall aggregate level of-- of valuation is not bad in an environment particularly where a big part of how you build a balanced portfolio IE safe quality assets is too rich. So there's a natural inclination. Let me get into-- into more of those assets, but I don't think they're overpriced today. And generally, I can find a few that you wonder why people are buying.

JULIE HYMAN: Well, Rick, you can always find those, I think. Rick, what's going to happen with rates before the end of the year? And is that going to change the valuation picture of-- of stocks? Because that's-- that's really one of the key areas that key risks that we're hearing strategists these days point to is that rates are going to go up. And that's going to be bad for a lot of American companies?

RICK RIEDER: So I mean, you know, we-- w agree that rates should move moderately higher, but you know rates have moved higher this year. The other thing about where we started this year, I think, the 10-year T-note got down a 51 basis points or so over the last 12 months. And so rates are higher than where they been, I think, rates are going to go higher these real rates are not priced right. I mean, if the Fed takes their foot off the gas a little bit rates could move higher. The Treasury is issuing to fund the fiscal expenditure, you know the amount of coupon supply, Treasury supply is higher. So I think, rates can move moderately higher. But then, you've got to step back and put in perspective.

How much higher rates go? And gosh, I think, the 10-year T-note will go up 30 basis points, maybe next year we get a few more basis points on top of it. You go back and think about that in time, let's say the 10-year T-note is going to be at one and a half, one in five 8%. You think about historically what that means and particularly what that means relative to you've got two things happening. Well, you've got historically low interest rates not as high as low, as they were a few months ago. But pretty darn low, and then you've got book value accretion our return on equity growth that is actually at all time highs.

So to move rates up 30 basis points is nothing. I mean, if it happened in a day or a couple of days, you know, people take a step back and say, gosh, I've got to readjust and I think about this. But it's not going to come on the back side of the Fed announcing, they're going to taper. I mean, you know each time the Fed comes out quote, unquote more hawkish. Markets that markets take about two hours to interpret it and then-- then they end up doing well again. So I think, you have to put in perspective this level of interest rates. And we're just rates are just not going to go that high from there just not.

BRIAN SOZZI: And Rick, switching gears a bit, I think, we were talking to earlier in the year when-- when BlackRock was just studying or looking at crypto and how it might get involved, where does the firm stand at today? Where are you involved in it aggressively, are you looking at? And where do you think prices can head from here?

RICK RIEDER: I mean, I have small pieces in-- in a couple of my big portfolios and-- and I view it as similar to when I own a venture capital or say, you know, we don't know a lot of venture. But second stage, a growth equity holding and so, my portfolio is gosh, I think, it could have some real upside. My sense is there's more buyers than Sellers, it is an asset class that I think is durable. Listen is it a hedge? Not really, it doesn't correlate with debt or equity. People say, it's a hedge or it's a hedge, it's a monetary policy hedge. I don't know. I mean, I see answers for that-- that are on the plus side negative side. So we own small-- small amounts of it. And you know, it's quite frankly, I'm glad I do because it's helped me learn about the evolution of what I think will be a blockchain technology that will continue to grow. So it's something we know, I'm glad I got involved with, but it's just not it's not driving portfolio return relative certainly my equities or my fixed income holdings.

JULIE HYMAN: I love it that at your stage of career, you can invest in something as an educational opportunity. I think, that's-- I think, that's great. I think, there's a lesson in there for all of us, I think, Rick. It is great to catch up with you. And I hope we'll see you again soon, Rick Rieder is chief investment officer of Global fixed Income at BlackRock, and also the head of the BlackRock global allocation team. Thanks so much, Rick appreciated.