BlackRock's Rosenberg Says Investors Can Come Back to the Bond Market

[00:00:00] Speaker 1: I want to ask you, I want to jump right to it, this idea of rising inflation volatility set to trigger earnings disappointments, wider credit spreads and more variability when it comes to stock and bond prices. Is it the ultimate macro risk in your view? Well, you know, it's one of the biggest challenges that investors face for another element that you didn't quite capture, which is the relationship between stock and bond returns. And that relationship has fundamentally shifted relative to the one that existed pre-COVID. And that is that stock and bond returns are much more positively correlated. And so investors have lost a form of diversification. And in the bond side of the equation, it's been a really important, unfortunate loss that they've lost basically insurance that used to pay for itself. And this is entirely related to inflation, inflation volatility, inflation shocks, and the fact that we're going on five years of above target inflation And when you're above target in terms of inflation, it undermines the bond market's belief that the Fed is unbridled in its ability to support equity market and equity market portfolios when they need it the most, when there's a decline in equities. And so that's what you're seeing right now in terms of the challenges from the recent, you know, developments in the Middle East around oil prices, oil uncertainty, feeding into inflation uncertainty. It's leading to higher bond bond yields and lower bond yields and lower bond prices at the time when equities are having their own challenges. So you've lost that diversification. And that's a huge loss. And it's something that we spend a lot of time trying to provide solutions for. [00:01:41] Speaker 2: But I think in this macro context, it's one of the biggest issues that investors face. So it's a challenge for investors, but so too, I think a challenge for Kevin Warsh next week. His second meeting as chair of the Federal Reserve, Jeff, you've shared a note with us that gets into the Fed communication and credibility. What does, what does the Fed chair have to do next week to appease investors and also appease the president? [00:02:04] Speaker 1: Yeah, it's, it's an incredibly important time. I mean, we just kind of draw back a little bit from, from the, from the headlines of the day and the week. It is a bigger story around the significant changes in this moment in history that Warsh represents for, for the outlook for the Federal Reserve. The report that you mentioned is our quarter, our third quarter BlackRock fixed income outlook piece. We go into more details in that. And one of the most important things I'm highlighting in that piece, and it's a piece with a lot of contributions from my colleagues. So it's not just from us in BlackRock Systematic. It's the entire breadth of fixed income investors across, as you mentioned, the world's largest asset manager. But one of the things I'm highlighting is just this, this importance that Kevin Warsh talked about in terms of trying to to restore the relationship between the Federal Reserve and market participants through the role of market prices. Rather than market prices taking their direction from the Fed, he wants to reverse that back to what existed kind of pre-GFC, where the Fed could take direction from market prices. And that's not going to happen overnight, but it's, it's a significant signal of a change in direction and objective of, of, of how he wants to see the institution really revert back to its prior form. They wrote a piece. There's a lot of discussion around the gain of function, critique of the Federal Reserve. And I think you're starting to see with these task forces, you know, some of the objectives of reversing some of that structural change over the last 20 years back to something that existed pre-GFC. And I think that's very consequential for investors, how we interact, how we think about the role of the Fed, forward guidance, the role of data and alternative data, and really about bringing back investor sentiment around determining prices rather than us trying to figure out what the Fed is going to do and then using that to determine prices. [00:04:04] Speaker 3: Right. You've got to put all that money in AUM under under management to work for your investors, Jeff. So having said that, in fixed income, I guess, you know, changing environments, it's how do you find the opportunities? Where do you see the opportunities? Where do you see the opportunities? What are the bets you make now that you think are viable? And I don't know what the time frame is. [00:04:26] Speaker 1: Investors all have different time frames. But how do you think about it for at least the next six to 12 months? Yeah. And it's some of the points that we make in this quarterly outlook that, you know, one of the big changes that is attractive from a fixed income perspective is, is with the normalization in terms of policy rates and interest rates. We've seen yields come back to the fixed income environment in an attractive manner. You have to take that into the context of the context of the history in which we're talking about where you went and really bond investors suffered through a long period of zero interest rates below inflation yield levels that really challenged the outlook from an income perspective. One of the most kind of good news stories on the fixed income side we highlighted in our Q3 outlook is that that yield perspective has been restored. You can come back to the bond markets, get yield that's above the level of inflation. It's above the level of inflation, maintain the purchasing power of your savings, which is sort of the ultimate charge of a fixed income part of the portfolio. But we also talk about the importance of selectivity that we're at a period in terms of valuations, the narrowness in terms of economic growth. But it's increasingly determined by one theme and that theme, of course, is AI. AI is both micro and macro. It's everything, everywhere, all at once. And that's good. And you're seeing that support in terms of the economic data, the CapEx, the expenditures, the technology contribution, and most importantly, the support through the wealth effect in terms of what we're seeing on consumption. Yet, at the same time, that creates a vulnerability. So selectivity in terms of security selection. And benefiting a bit from some of the dispersion that we see in some parts of the market helps to navigate. It's essential to navigating through the fixed income environment over that kind of timeframe that you were talking about. Great wait. Kind of quarter to six months.