logo

Bond pros offer tips in negative-rate world: 'You can build balance'

Key Points
  • More than $15 trillion worth of negative yielding debt has created headaches for fixed income investors.
  • Bond strategists are finding their way around the markets, using a variety of products to generate returns.
Michael Arougheti and Sarah Bloom Raskin during a panel discussion at the 2019 Delivering Alpha conference in New York on Sept. 19, 2019.
Adam Jeffery | CNBC

Plummeting interest rates that have resulted in more than $15 trillion worth of negative yielding debt have created headaches for fixed income investors.

Still, bond strategists are finding their way around the markets, using a variety of products to generate returns even amid the era of central bank activism that has seen rates set at historic lows.

"You can build balance in a portfolio that makes a lot of sense," Rick Rieder, global chief investment officer for fixed income at asset management giant BlackRock, said Thursday at the Delivering Alpha conference presented by CNBC and Institutional Investor.

Rieder spoke of a slew of products that include mortages and credit market, and even said savvy investors can use the negative yields prevalent in Europe to generate strong capital returns when those bond prices are converted into U.S. dollars.

Still, he acknowledged that the basement-dwelling yields are encouraging bad behavior.

"What people are doing, and it's dangerous, is they're stretching down the credit structure," he said. "Most investors have to take more risk to generate less."

VIDEO2:4502:45
Wall Street pros gather at CNBC's Delivering Alpha—Four experts' stock picks

Others in the panel also spoke of the strategies they're using to generate returns in a climate where the normalization of interest rates is likely a long way off.

Michael Arougheti, co-founder and CEO of Ares Management, talked about private market financing including "transitional" mortgages, or short-duration bridge loans. David Villa, executive director and chief investment officer for the State of Wisconsin Investment Board, said he's been struggling to reach his mandated 7% return, though this year' he's up about 13%.

Former Fed Governor Sarah Bloom Raskin worried about some of the maneuvering in the bond market, wondering whether it is encouraging "bubble-like behavior."