BlackRock Cool on Long Bonds in Bet Fed to Let Inflation Run Hot

Updated on
  • Rieder says he’s more comfortable holding shorter maturities
  • Inflation bet comes even as price gauge holds below 2% target

BlackRock Inc. is shunning long-term Treasuries following a surge in 2016 in a bet the Federal Reserve will allow a pickup in inflation.

“We think the Fed is likely to allow inflation to run hotter than its target for a while,” Rick Rieder, the chief investment officer of global fixed income in New York, wrote in a report Sept. 2. “While we have believed that there was more value in longer-end interest rates over the past year or so, we are more comfortable holding shorter, or belly, interest rate exposure.” BlackRock is the world’s biggest money manager with $4.6 trillion in assets.

The yield on the benchmark U.S. 10-year note fell one basis point, or 0.01 percentage point, to 1.52 percent as of 10:06 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 99 3/4. A rally Tuesday pushed the yield down seven basis points, or 0.07 percentage point.

U.S. inflation that’s at less than half the Fed’s 2 percent goal helped 30-year bonds return 19 percent this year, based on Bank of America Corp. indexes. Treasuries due in one to 10 years gained 3.4 percent, the indexes show.

The latest inflation indicators have been mixed. A price gauge tied to personal spending the Fed uses to guide policy rose 0.8 percent in July from the year before, dropping from its 2016 high of 1.1 percent in January. The figure is 1.6 percent excluding food and energy. Core consumer prices are running at 2.2 percent.

Break-Even Rate

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices known as the break-even rate, has declined to 1.5 percentage point from 1.74 percentage point as recently as April 29. The figure has been below 2 percent since October 2014.

For more on the outlook for U.S. inflation, click here.

San Francisco Fed President John Williams painted an upbeat picture of the U.S. economy in a speech Tuesday in Reno, Nevada. The inflation rate will rise to 2 percent in the next year or two, he said. The path for U.S. interest rates is flatter than he thought a year ago, he said. Williams does not vote on monetary policy this year.

Maybe 2017

The odds the central bank will raise interest rates as soon as its next meeting this month are 20 percent, futures contracts indicate. The probability rises to 72 percent for 2017.

There are enough signs of inflation for the Fed to raise interest rates once this year, maybe as soon as its next policy meeting Sept. 20-21, said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which has about $52 billion in assets.

“There are signs of increasing earnings and housing prices,” he said. “We cannot ignore the risk of higher inflation.”

Katayama said his Treasury holdings are “a bit” shorter in duration than those in the benchmark he uses to gauge performance, indicating a more bearish view.