Credit markets are in the midst of a correction with yield spreads close to historic lows while investors anticipate higher benchmark interest rates, according to BlackRock Inc.’s Rick Rieder.
“There’s no doubt we should correct,” Rieder, whose company is the world’s biggest money manager, said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Alix Steel. “We are in the middle of correcting in fact, but when you actually take a step back and look at what the true fundamentals and the technicals are, it’s pretty good.”
Rieder, New York-based BlackRock’s chief investment officer for fundamental fixed income, spoke after the Labor Department reported U.S. employers added 209,000 workers in July. Economists in a Bloomberg survey estimated a gain of 230,000. Benchmark U.S. Treasuries rallied after the report, helping to push yields lower on most fixed-income securities.
Bonds of all types have returned the smallest gains last month since March, according to the Bank of America Merrill Lynch Global Broad Market Index, which tracks $43 trillion of securities. Returns of 0.19 percent through July 31 added little to the 4.23 percent rally in the first half of the year.
“It is the time of year where we pull back a little bit,” Rieder said. Investors may also be anticipating an increase in issuance later in the year, he said.
With U.S. employers adding more than 200,000 jobs for the sixth straight month, “the markets are adjusting to the fact that the Fed is going to move faster than people think,” Rieder said.
Traders see a 58 percent chance the Federal Reserve will raise its benchmark rate target to at least 0.5 percent from virtually zero by next July, fed funds futures show. The likelihood of an increase by September 2015 is 70 percent. The odds yesterday were 65 percent for July and 78 percent for September.
Any selloff in the bond market triggered by the Fed’s unwinding of unprecedented monetary stimulus is likely to limited, Rieder said.
“I’m not worried that it’s going to be a tremendous devastation at all,” he said.