BlackRock Wasn’t Fooled by Jerome Powell’s Flub
(Bloomberg Opinion) -- Rick Rieder, BlackRock Inc.’s chief investment officer of global fixed income, has accomplished a lot during his three-decade career on Wall Street. But being on the forefront of a Twitter hashtag campaign? That’s a new one.
On Oct. 3, when Federal Reserve Chairman Jerome Powell shocked financial market observers by saying that “we’re a long way from neutral at this point, probably,” Rieder promptly took to Twitter to take the opposite view of most other traders, who saw this as a hawkish comment from the leader of the U.S. central bank. As a reminder, on that day, the yield on five-year Treasuries, among the most sensitive to the Fed’s policy path, rose 9 basis points, one of the sharpest increases of the past two years.
He ended his tweet with a simple phrase: #fedpause.
It took almost two months, but the markets have finally come around to Rieder’s way of thinking. Five-year Treasuries now yield just 2.78 percent, down from as high as 3.1 percent in early November. Just this week, for the first time in more than a decade, the five-year yield dropped below those on two- and three-year maturities, inverting those portions of the U.S. curve and indicating that the Fed probably has only a few more rate increases before it’s done. That’s in contrast to officials’ “dot plot,” which has a median projection of five more by the end of 2020. That’ll be updated after the central bank’s meeting later this month.
What was Rieder’s secret for being early to go against the market narrative of a Fed hellbent on tightening policy further? The answer is almost disappointingly simple: “The data is slowing.”
“How could anyone say anything other than the housing market is significantly softer?” he said in an interview. He rattled off data points including existing home sales (which fell for six consecutive months from April to September), home-builder sentiment (which plunged recently by the most since 2014) and mortgage rates (which are close to the highest since 2011). Other parts of the economy that are interest-rate sensitive, like automobile sales and small-business lending, are also feeling the pinch, he said.
“Corporate numbers tend to lead pretty aggressively,” Rieder added. And as my Bloomberg Opinion colleague Robert Burgess noted this week, profit forecasts are looking weaker. Effectively, those who wagered that the Fed would tighten until something breaks should have seen these glaring cracks rather than reading too much into a single remark.
Of course, even knowing all this, investors still face a duration dilemma. Rieder has said at least since last December that he favors short-term Treasury notes. When asked, he admits: “I still love the front end.” And why shouldn’t he? Even in a year of steadily rising interest rates, two-year Treasuries have returned 0.65 percent, according to ICE Bank of America Merrill Lynch data. By Rieder’s bond math, the Fed could boost rates 12 times between now and this time in 2019 and the two-year maturity would still make money. And if the Fed halted altogether, that would only add to the gains.
Yet Rieder acknowledges that loading up on two-year notes isn’t the clear winner it once was. “For the first time, if you have a Fed that’s achieved most of what it’s going to do, you can use duration to hedge your risk,” he said. A reasonable move, he said, would be to take 25 percent to 33 percent of money allocated to short-term Treasuries and move out to five or even 10 years. Those two maturities have gained 1.34 percent and 1.9 percent since Oct. 3, respectively. For BlackRock, which manages more than $1.85 trillion in fixed-income, any sort of shift matters.
Others appear to be employing a similar strategy. The $15.4 trillion Treasury market has experienced an obvious duration grab this week. With the yield curve from two to five years inverting, investors appear to be gobbling up 10-year notes while they still offer better yields. The difference between two- and 10-year U.S. yields dropped Tuesday to less than 10 basis points, the least since June 2007. A month ago, that spread was more than 30 basis points.
Even 30-year bonds rallied, with the yield falling below the 3.22 percent yield level that DoubleLine Capital’s Jeffrey Gundlach earlier this year flagged as crucial. Bloomberg News’s Stephen Spratt and Edward Bolingbroke wrote that a big short squeeze could be coming, something that Gundlach suggested was possible in August.
“The Fed’s got to be thoughtful about not choking off the economy,” Rieder said. “Last Wednesday was such a big deal. I think we learned that this Fed is going to be pragmatic.”
Some bond traders gleaned the central bank’s pivot even earlier, taking Vice Chairman Richard Clarida’s comments on slowing global growth in mid-November to mean that the Fed would take its time. Rieder was among them.
But the market appears to have truly hit a turning point after Powell’s Nov. 28 speech to the Economic Club of New York. Rieder took to Twitter the following day to promote his hashtag one more time.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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