BlackRock's Rieder says Fed rate hiking means stocks could get cheaper and short-term debt more attractive

Published Fri, Sep 16 202210:14 AM EDTUpdated Fri, Sep 16 20223:21 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

BlackRock's Rick Rieder said higher-quality, shorter-duration fixed income investments have become very attractive, but the sell-off in stocks has a ways to go and investors will be able to buy equities at a better value from here. "I think if you said to me the story of the first half was to hold cash, the story of the second half of this year is you can hold assets that are cash-like and get paid a lot of carry, a lot of income," said Rieder, the firm's chief investment officer of global fixed income. Carry is the difference between the return from a bond's yield and the cost of financing the investment. The Federal Reserve's interest rate hikes and the anticipation for even higher rates have been pushing up yields. The shorter end of the curve has seen a big jump. The 2-year Treasury yield, for instance rose to 3.858% on Thursday, the highest level since 2007. "From an asset allocation point of view, you can have high quality, not take a lot of interest rate risk, and you can get some really good yields now," Rieder said, in a phone interview. He said 1-year and 2-year paper are a good place to look for yield. In an environment where the Fed is raising rates, longer-duration, interest-heavy assets become a larger risk, he notes. Turbulence for stocks will continue While yields are rising, the Fed's rate hikes have not been good for stocks. Rieder said the stock market rout is not over, and investors should be holding fewer equities than normal. "There's going to be a point where it's going to be clear the Fed has reached the terminal rate and is going to pause," he said. "At that point, equities and emerging markets will look good." Rieder expects rates could still trend higher, but "we think we are close to seeing the higher end of a potent 2022 rate-rise cycle." He notes shorter-dated credit and higher-quality securitized assets yielding 4.5% to 6.5% could be an attractive source of carry and return. This would include corporate bonds. Securitized assets could include such things as mortgages, auto loans or credit card debt. High-yield debt spreads are the highest since spiking in 2020. "A lot of AAA and AA securitized assets now get you 5.25% to 5.5%. Corporates, depending on where you go, might get you mid to high 4s," Rieder said. A year ago, those corporates yielded less than 2%.