It's a 'golden age' of fixed income, says bond-market goliath

By Joy Wiltermuth

Stocks can still 'do well,' but the compensation for taking equity risk is near the lowest in 20 years, BlackRock CIO says

U.S. stock prices might be back in record territory, but it's the bond market that's hit a "golden age," according to Rick Rieder, BlackRock Inc.'s chief investment officer of global fixed income.

Rieder, in the wake of last week's big interest rate cut from the Federal Reserve, said expectations for rates were for persistent moves lower over the next two years, which will benefit fixed-income, albeit perhaps not in a straight line.

He followed up with a post on social media Tuesday, noting that yields in the "belly of the curve" remain historically high, while the amount of compensation for taking equity risk has been around a 20-year low.

The S&P 500 index SPX was struggling for direction near record territory on Wednesday, up 20% on the year so far, according to FactSet.

Bond managers tend to focus on starting yields, which still remain historically high, because they serve as a reliable predictor of future income. Higher-coupon bonds can become more valuable when rates fall because of their scarcity value. BlackRock, which oversees $2.8 trillion in assets, is one of the world's largest fixed-income managers.

A recent change in fixed income from two years ago has been the retreat of peak, short-term Treasury yields, a favorite "cash" investment. They moved lower in anticipation of last week's Fed rate cut, the first in four years.

While the rate on 3-month Treasury bills BX:TMUBMUSD03M was still around 4.6% on Wednesday, that's down from a recent peak of about 5.4% in April, according to FactSet.

In keeping with Reider's comments about bonds and a straight line, the 10-year Treasury yield was back on the climb, near 3.8% on Wednesday. A weak reading of consumer confidence for September on Tuesday briefly sent it higher, while the 2-year Treasury yield BX:TMUBMUSD02Y fell to about 3.5%, its lowest level in two years.

Financial markets have been unusually sensitive to fresh economic data, largely because Fed Chair Jerome Powell has stressed that the central bank's next moves on rates will hinge on it, especially anything pointing to further weakness in the jobs market.

While less directly sensitive to Fed rate moves, the 10-year Treasury yield BX:TMUBMUSD10Y matters because it serves as a direct peg for pricing things like new auto loans, mortgages and more.

It has been climbing off recent lows, meaning that hoped-for relief for households and companies from the Fed's start to a cutting cycle has yet to arrive. If sustained that could weigh on the economy just as the important holiday shopping season nears.

Read: The 10-year Treasury yield is climbing after the Fed's big rate cut. Why investors should be concerned.

The Nasdaq Composite Index COMP was up 20.8% on the year so far, while the Dow Jones Industrial Average DJIA was 11.5% higher in 2024.

-Joy Wiltermuth

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09-25-24 1058ET

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