BlackRock has increased its holdings at the long end of the Treasury curve and expects yields to fall even further, as investors react to the coronavirus.
The 10-year Treasury note yield, which moves opposite price, has dropped to 1.61%, about 22 basis point from where it was before markets were first spooked by the virus a week ago.
"It's hard to predict how this news flow is going to go. This is an exogenous thing. I could see [10-year] rates getting another 10 to 15 basis points lower," said Rick Rieder, BlackRock's global CIO of fixed income. "If it got significantly worse, you'd get another 30 basis points. If you started to see some real hits on travel and businesses closing...the markets would react to that."
Rieder said it's possible the 10-year could touch 1.30%, but that's not his base case. It hit a low in September of 1.43% and a lifetime low of 1.37%, just after the U.K.'s Brexit vote in July, 2016.
While the market is mainly moving on the virus, he said there's also election risk that markets are just starting to focus on. Analysts have said the rise in the polls of Vermont Sen. Bernie Sanders is creating concerns that some of the more progressive views of the Democratic candidates are gaining momentum. The market view had been that President Donald Trump would easily win even with his impeachment, but doubts have cropped up in recent sessions.
The Iowa caucus Feb. 3 is also pulling market attention toward the election. Online betting market PredictIt shows Sanders' odds of winning the Democratic nomination at 40%, six percentage points above second place, former vice president Joseph Biden.
Rieder said he started the year favoring the short end of the curve, but last week his view changed and added more 10-years and 30-year bonds.
"It's not like rates are going to drop significantly, but we think they are a really good hedge for risk and particularly risk assets," he said. "I do think Treasurys and particularly the long end will work as a flight-to-quality asset. You couple that with this incredible supply demand." He said pensions and insurers are hungry for duration plays, particularly at the beginning of the year.
"We still like the front end, but we definitely shifted in the last week," he said. "We've definitely layered in more long end duration in decent size."
Rieder said the market is mostly moving on the virus, and just moderately on the election worries. He said stocks have gotten cheaper, making some names more attractive. He said he expects a small single digit decline in equities.
"I could see it down three to five percent in the next couple of weeks to month. I have a hard time envisioning more than that," said Rieder.
Rieder said he does not expect the Fed to take any action this week, though it could raise the interest on excess reserves by 5 basis points. Analysts expect the Fed to nudge that rate higher, in an effort to push its fed funds rate slightly higher. It had been trading close to the bottom of its 1.50 to 1.75% range.
The Federal Open Market Committee begins meeting Tuesday and will issue a statement Wednesday, followed by a briefing by Fed Chairman Jerome Powell.
"This is going to be an uneventful meeting. I think the Fed is doing the right things," he said, adding he is watching to see if the Fed makes more comments about how it views inflation. Powell has said the Fed is willing to let inflation run above its 2% target for awhile before it would act on interest rates. The Fed has also indicated it is not moving on interest rates until it sees some change in its outlook.
But Rieder is watching over the next several months to see if the Fed increases talk about financial conditions and the fact that its policy could be helping create easy conditions. He expects that discussion to emerge as the Fed considers winding down its purchases of $60 billion in Treasury bills each month, as a means to expand its balance sheet.
"I think they'll start to taper it down, and I think they'll be very deliberate and prescriptive about how they're going to do that," he said. He said the Fed is adding a lot of liquidity to the financial system on its own, but it is even more massive when combined with the efforts of the People's Bank of China and the European Central Bank.
"I think they'll start to taper down the program sometime during or toward the middle or the end of the second quarter," he said. "My sense is they're beginning the discussions but those discussions will gather momentum in the next month or two."