Blackrock Recommends Lowering Bond Duration Amid ‘Hypnotized’ Markets

by Mark Melin

BlackRock, Inc. (NYSE:BLK)’s Chief Investment Officer for Fundamental Fixed Income Rick Rieder thinks that “markets are hypnotized” and, using an old Wayne Gretzky hockey expression, investors need to go “where the puck is headed.”

Speaking at a June 18 presentation, the slides of which were reviewed by ValueWalk, Rieder noted a historic benchmark at this unique point in time as he found the open area in the high slot, unnoticed to the side of the net.

Blackrock: Portfolio should be balanced and liquid

As an interest rate experiment that some consider of Frankenstein proportion is coming to an end, while others considered it a rally sustaining and economically viable method to stimulate an economy to life after a crash of historic proportion, there is one thing that can be agreed upon. The unconventional policy measures could turn bonds into a risk asset, particularly at the long end of the yield curve.

In such an environment, Blackrock suggests taking a different tact. “Portfolio allocation should reflect more of a barbell, utilizing more liquidity, higher levels of cash. The levels of “cash” show in how it views long duration bonds. While the firm would recommend long duration bonds during most economic periods of time “except where excessive monetary policy starts to unwind” as is taking place in the U.S. currently.

Blackrock: High yield corporate paper may not be attractive in rising rate environment

The Blackrock report scans the supply and demand spectrum on the market, noting the impact quantitative stimulation has had on the markets. “Excessive policy has created a scramble for the very scarce yield opportunities within a distorted interest rate environment.” What happens when interest rates are suppressed? Risky investments become more appealing.

“Corporate issuers are filling some of this void by putting a tremendous amount of ‘expensive’ duration into the market.” In other words, with interest rates so low, even the riskiest paper, that might normally fetch a double digit yield, now receives very little reward for a great deal of risk. In a rising rate environment, such investments could lose value rather quickly.