'BIG DEAL': BlackRock Global Fixed Income CIO discusses what's 'under the surface' with rate hikes

[00:00:00] Speaker 1: Let's get right to the floor show. Joining me now in a Fox Business Exclusive, BlackRock Global Fixed Income CIO and Head of Global Allocation Team, Rick Reeder. Rick, these are major drops in the yields of these treasuries. What's going on? [00:00:13] Speaker 2: It's a good day to be on. It's been pretty incredible. I think there are a couple things at play. You know, it's interesting. Markets, everybody gets on one side of the boat or the other. There's been a big trade that people have had on, speculative investors have had on, long AI short bonds. And it's been a good trade. I mean, it's been a durably good trade, long AI short bonds. It started last week after the CPI report, which showed high levels of inflation. All of a sudden, people were pushing that, like, wow, rates are going higher again. And then we saw this epic turn. And then all of a sudden, people realized everybody's in the same trade. Listen, I think there's something also underneath the surface that's a pretty big deal. When the Fed pushes rates up, when you get rates moving up at the level they're moving up, once things start to break, you're starting to see triple C in parts of the high-yield market that are coming under pressure, things like commercial real estate have rollover. And the markets are getting a little bit concerned. You know, we talked about some of the neoclouds and the financing dynamics. All of a sudden, you say, wow, maybe rates now are a bit of a flight to quality asset. If you're pushing rates to a level that you're going to have some rollover financing versus some default potential. [00:01:18] Speaker 1: The Fed raised rates a quarter of a basis point for the first time, a quarter of a percent, rather. Yeah. Yeah. For the first time in three years, what do you mean, raising rates to this level? [00:01:28] Speaker ?: Yeah. [00:01:28] Speaker 1: So, you know, it's a... It barely touched rates. [00:01:30] Speaker 2: So, listen, I mean, I'll say one thing. I know you've been kind enough to have me on for a long time. I don't believe the Fed should be raising rates, personally. I don't think it does anything for inflation. I think that is an archaic Pavlovian response to inflation that you just raised the overnight funds rate doesn't really do anything. When you think about what's driving inflation, oil prices, not really driven by rate. Things like semiconductor prices, not really driven by that. But what's happening now is you're seeing a paradigm at play that all of a sudden, all financing costs are going up in the anticipation. Not that they've only raised a quarter, but they're going to keep going. I think what the markets are doing now is they're reevaluating, gosh, maybe the Fed doesn't have to go, which I would argue they shouldn't go. By the way, you also compound a debt problem in the country when you keep raising interest rates. That fiscal discussion has also manifest itself much more aggressively. So, listen, I think there's a series of things, and I think we've been talking about it recently. Does the Fed need to keep going? And, you know, it's interesting when you heard some change from Kevin Warr, some other members of the Fed talk about recently, maybe we can wait in October before hiking again. [00:02:37] Speaker 1: We put the 10-year back up because this is a pretty stunning jump in a pretty stunning drop in the actual basis point move for the yield. So, you've got it down nearly 17 basis points. You said a lot of people got overcrowded on the long AI short bonds trade. Correct. That's got to include hedge funds. You see this being harsh enough to wipe out some hedge funds or really cause some damage? [00:03:00] Speaker 2: I mean, today, I mean, so, by the way, I'm always blown away by how markets – oh, there's the thematic of the day. Yeah. We move in a place, and I think as you see this in betting markets, you see the markets have become, I need an answer, and I'm betting on it, and then all of a sudden you've got these extreme moves that happen. This has been pretty profound. In fact, you know, I track volumes and how much we're seeing in terms of – it hasn't been huge volumes today, but what happens is when you get markets like this, the sellers, the sellers, like, just back off and say, gosh, this thing could keep going. So, today has been a pretty epic move of that unwind. Listen, I think one of the things – I'm going to say something that I think is pretty significant around this. For how many years did we talk about with equities, there is no alternative. When you press these real rates to a level, and I said it the other day, that I think Tiaba, meaning there is a big alternative now, we can create fixed income portfolios. You mentioned the ZTF, we have BINC, 7% yield with a three-year duration, three years of exposure, A- rating. Okay, my equities have had a pretty good run, and now we're at the all-time high of people's portfolios being long equities. They just keep running up, and at a low, and people have said, you know what, equities are good, I don't need anything else, and now all of a sudden people say, gosh, we need it. [00:04:13] Speaker 1: Okay, so we have BINC up on the screen here, and this is a bond fund that is actually tweaked by you, and your team constantly. Yeah. So what's in it, and why wouldn't it be affected by these falling yields? [00:04:28] Speaker 2: Yeah, by the way, I was saying it's a fun one, because that chart doesn't include our dividend yield, because we're paying 7% out, so that's only price return. [00:04:36] Speaker 1: Yeah, don't get tricked, it's not a stock chart, folks. It's not, you've got a better yield. [00:04:41] Speaker 2: So, BINC, by the way, the three-year cumulative return of BINC is 23.5%, which is what happens with bonds, you know, let's say something that is hugely different between equities and bonds. P-E ratio is a terrible indicator of future return. In fact, it has almost no correlation to one year forward. So people say 20 multiple, 19 multiple. What matters for bonds is a yield you start at. If you hold a 7%, it doesn't mean you're going to rally, and it doesn't mean like we've had interest rates move up. It doesn't mean you're going to rally or generate their return the next week or the next month. But if you hold it for a year, or two years, or three years, you're going to get your 7%. And that's what's pretty amazing today, is like, boy, you know, I lived for, I mean, how many, nine years. Remember, Europe, we had negative interest rates. Negative interest rates. For a long time. Now we're buying, we're building portfolios that are A-rated, A-rated at 7%, and, you know, without taking a lot of risk. That's pretty amazing today. And that's why you're seeing days like today, people saying, gosh, I've had a heck of a run in equities. I've had a heck of a run in tech. And the earnings, so 10 stocks today drive 70% of the earnings growth of the S&P 500. 10 stocks. You don't own the S&P 500. You own the S&P 10. And so people are like, and so when you see days like today, they're like, oh, my God, I am levered to a pretty finite portion of the market. [00:05:55] Speaker 1: Things do break, whether there is a ton of capital out there, or there is so much demand, as Jensen Wong of NVIDIA is saying, oh, there's tons of demand for everything that neoclouds do and everything that the hyperscalers are doing. But you look at some of the credit default swaps. These are the insurances against default. Meta's five-year credit default swaps hit a record high today. Is that the market saying there's a pretty decent chance that Meta could default? I mean, are you worried about contagion from something like this? We've also, on a smaller scale, looked at core wave or Oracle's credit default swaps. [00:06:33] Speaker 2: Yeah. So, I mean, I think you asked exactly the right question. And by the way, I want to say one thing. I'm not bearish on equities. I actually think for the next year, equities will go. If you said to me, one year forward, where are we going to be? I bet equities are up 15%, maybe it's 12%, maybe it's 18%. They're pretty good. We've had almost 30% earnings growth. You've got an economy that's probably not going to grow at 7% nominal GDP like it's growing today, are now cast at 7% nominal. But what happens when you go through periods like this is all of a sudden the markets start to separate. Okay, who are the winners or losers? Who has to finance at these higher rates? I'm not worried about Meta at all, at all. But there is differentiation taking place and people are saying, okay, who can finance? Because you're going to see massive CapEx. Who can finance? Who has enough cash flow coming through their business that can do all that financing? And the ones that don't have that persistent other lines of cash flow are clearly seeing some pressure. [00:07:26] Speaker 1: Yeah, pressure right now, NASDAQ down 767. Before we go, Rick, when we talk about the credit ratings agencies, they also don't want to see a repeat of 2006, 7, 8, where they were caught flat-footed on calling credit default swaps and things like that at the right levels. They were very late on that and they got a lot of heat for it. Do you think that you will start to see some of the ratings companies turn around and say, we're cutting some of this debt to junk? [00:07:57] Speaker 2: So, I mean, you know, I follow ratings a little bit. I mean, I have to say we do our own organic work and evaluation of companies. I think whether it's the credit rating agencies or others, you'll start to see whether it's commercial real estate, whether it's credit, it's like you have to get some covenant relief, you have to get some rollover financing. And so I think the market is doing it in real time. Is it saying, okay, winner, risky, winner, risky. And I think, you know, I think you're going to see more of that. I think you'll see dispersion. And part of what I said, I like the, I think the equity model will have a good year. It's just going to be because you're so tethered to AI and so tethered to tech, almost definitionally, you're going to have more volatility going forward. And I just think part of what, you know, what I said on this call we did today is I just think you've got to move the needle a little bit more to balance. The fact that it's all happening in one day is pretty extraordinary. But I think you have to move a little bit more to balance in the portfolio. You can get income. You can get into these real rates. And by the way, the flip side of this, companies are now going to start issuing equity versus debt because now all of a sudden the cost of capital has become equilibrated. So, which we haven't seen in years because your debt's been cheap and now your debt's expensive and your equity is actually as an issue or is actually an attractive issue. [00:09:13] Speaker 1: Well, this is one heck of a day to have you. [00:09:15] Speaker 2: No, I'm very super lucky. Thanks for having me on today. [00:09:17] Speaker 1: Listen, thanks for being here. Rick Reeder of BlackRock. [00:09:21] Speaker 2: Make sure to like and subscribe to the latest news on Fox Business on YouTube. And you can catch full shows streaming now on Fox One.