Yields on 10-year Treasury notes will rise above 3 percent as the Federal Reserve scales back its debt purchases, according to Rick Rieder, chief investment officer for fundamental fixed-income at BlackRock Inc.
The Fed’s quantitative easing “is too big,” Rieder said in an interview with Tom Keene and Sara Eisen on Bloomberg Television. “You have got to taper down QE. It has created this tremendous distortion in interest rates. We think fair value on the 10-year is close to 3-to-3.25 percent. You are getting very close to there.”
Yields on the benchmark security rose today as high as 2.87 percent, the most since July 2011, which is also when they last last reached 3 percent. A survey of forecasters by Bloomberg projects that the yield on the note will end the second quarter of 2014 at 3.02 percent.
The U.S. central bank has been buying $85 billion of Treasuries and mortgage securities a month since January to keep borrowing rates low and spur economic growth. The Fed’s first step may be tapering monthly debt purchases in September by $10 billion, according to the median estimate of analysts in a Bloomberg survey concluded this month.
“Most of the losses have come because the distortion is coming out,” Rieder said. “We think you are going to have moderately negative returns in bond funds, certainly this year into next.”
Treasuries have lost 3.6 percent this year through Aug. 16, according to Bloomberg World Bond Indexes.
“People are going more to unconstrained bond funds,” which can more aggressively manage interest-rate risk, Rieder said. Investors want bond funds that “can actually go short duration. They want income so you are seeing the money shift.”
BlackRock, the world’s largest manager of assets, is joining companies including Legg Mason Inc.’s Western Asset Co. in betting that bond funds that aren’t constrained by duration, strategy or region will attract money as interest rates start to rise and investors shift assets from traditional fixed-income offerings, which are limited in how they can react to falling bond markets.