3 Areas Where BlackRock’s Bond Guru Is Finding Income

Rick Rieder, chief investment officer of fixed income for BlackRock, says bonds pose a real alternative to stocks right now. (Christopher Goodney/Bloomberg)

Key Points

• BlackRock bond guru Rick Rieder says the era of there being no alternative to stocks is ending as bonds offer historic opportunities with less risk.
• Rieder says investors can find hefty yields in shorter-term bonds, emerging-market debt and bonds of artificial-intelligence hyperscalers.
• Rieder expects the Federal Reserve to raise interest rates in December and potentially start easing rates in the second half of 2027.

For more than a decade, investors have stuck with the mantra that stocks in a world of paltry bond yields were the best option. Those days are over, according to BlackRock bond guru Rick Rieder.

He says the long popular theme known as TINA—short for “there is no alternative” to stocks—is coming to an end. Instead, there are historic opportunities for investors who want more yield without taking on too much risk.

“Now we have TIABA—‘there is a big alternative,’” Rieder, BlackRock’s chief investment officer of global fixed income, tells Barron’s.

Of course, equities might still do fine. But Rieder says pensions, endowments, foundations, and others looking for income can find hefty yields without having to hold the longer-term debt of the U.S., United Kingdom, and Japan, which are all grappling with widening deficits.

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Instead, investors can consider shorter-term bonds, debt of hyperscalers looking to finance the buildout for artificial intelligence, and emerging market bonds.

The shift toward bonds comes as interest rates are rising on the back of inflationary pressures driven partly by the war in Iran—and as rising deficits push investors to demand a higher yield to provide the U.S. financing. As a result, Rieder says investors can currently buy shorter-term bonds and generate notable income.

“It has been pretty wild that even with interest rates going up and negative returns across part of fixed income, the money in fixed income is growing in terms of people putting money in,” he says. “It’s a reflection that people are saying, ‘Gosh, there’s an alternative!’ ”

Case in point: The $17 billion iShares Flexible Income Active exchange-traded fund that Rieder manages is yielding more than 7%, with an average duration of under three years and an A-minus credit rating. The ETF owns an array of bonds, including high-yield and emerging markets debt, investment-grade corporate bonds, as well as agency mortgage-backed securities.

“This is a very unique point in time,” he says. “Usually, when you can buy yielding assets at these levels, particularly high-yield, there is an organic problem with those companies or sectors. Today, you don’t have that. You have an economy growing. Our forecast is well over 6% [for U.S. nominal GDP growth].”

Rieder has also increased his exposure to emerging markets. These economies have become considerably less volatile than developed markets, in part as they have improved their fiscal health, he says. With the U.S. running growing deficits, it is hard to see the U.S. dollar appreciating significantly, he adds. That makes emerging markets—whose economies do better when the dollar weakens in part because it eases borrowing costs—much more attractive.

Plus, many of these markets are benefiting from a commodities boom driven by increased spending on energy diversification and the AI buildout.

“Emerging markets have become more than a diversifier,” Rieder says, noting that they can generate alpha, or additional returns outpacing other benchmarks, and considerable income.

Another attractive area for Rieder are the bonds of some AI hyperscalers, which tend to have low levels of net debt and strong cash generation. As the Federal Reserve has raised interest rates, there is growing consternation around the impact of higher rates on the financing needed for the artificial-intelligence buildout. But Rieder doesn’t see the overnight federal-funds rate having much impact on capital expenditures, noting that the internal rate of return on AI is high for now. In fact, Rieder says some of the hyperscaler bonds are attractive after a rise in yields.

“Ultimately, productivity will kick in and that will bring inflation down and that will bring interest rates down. There are a lot of problems that will be solved through higher levels of productivity,” Rieder says.

The one tricky part, however, is that the jobs picture could become more challenging. That’s one reason Rieder says he thinks the Fed will raise rates in December but ultimately not hike much more—and could actually start easing interest rates in the second half of 2027.

As for the concerns about France’s deficit issues and recent bond rout, Rieder says he doesn’t necessarily see a crisis brewing in Europe. He says France’s troubles are consistent with what is playing out elsewhere in the world, including parts of the U.S. as higher interest rates put parts of the population under pressure.

With elections in France, the U.S., and elsewhere, there are risks. But Rieder says the U.K. experience in fall 2022—when markets balked at Prime Minister Liz Truss’ budget that included unfunded tax cuts amid double-digit inflation—has stuck with both policymakers and investors.

“Going forward, I think it’s in the back of every investor’s mind: We have got to keep an eye on these fiscal situations and on political rhetoric toward budgets,” he says.

Fiscal debt situations around the world are on Rieder’s risk radar. So, too, are geopolitics: “Interest rates would be 30 basis points lower if it weren’t for the Iran war,” he adds.

If the war is drawn out but oil prices stay where they are, Rieder thinks the market will be OK—it’s unexpected moves in oil prices that will be disruptive.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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