BlackRock’s Rick Rieder says this is a ‘golden age of fixed income’

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It’s hard for the everyday investor to know what to make of the bond market any more.

Since time immemorial, it was the wise and dependable counterpart to the erratic stock market, offering stability in moments of financial mayhem.

That symbiosis has crumbled over the past couple of years. The outbreak of inflation in 2021 and the leap in interest rates that followed incited one of the worst bond market crashes in history.

Long-term government bond indexes in the U.S. and Canada fell by roughly 50 per cent from peak to trough. The 60/40 stock/bond split that served as a model portfolio for countless investors was decimated by the end of 2022.

With that, a generation of investors soured on the bond market.

But turn your back on bonds at your peril, as this is a “golden age of fixed income,” according to Rick Rieder, chief investment officer of global fixed income for BlackRock BLK-N – one of the world’s largest bond managers with US$2.8-trillion in assets.

Forget what you once assumed was immutable about the bond market. Instead, consider a rare chance to get paid while taking on very little risk, Mr. Rieder says. The same can’t really be said of the stock market.

Mr. Rieder spoke to The Globe and Mail in conjunction with the launch of BlackRock’s first active bond exchange-traded fund in Canada – the iShares Flexible Monthly Income ETF XFLI-T.

Coming off one of the worst selloffs on record, how do you see the state of the bond market right now?

I think the bear market is over. And with inflation coming down, rates are very attractive for yielding assets. The income you can create, you can get a yield of around 6 per cent. As interest rates come down, maybe that gets you to 8 per cent or 9 per cent. It doesn’t get a lot better than that.

You’ve been calling this a “golden age of fixed income,” correct?

Yes. To get this kind of yield, you’d usually have to either go further out on the yield curve and take on a lot of volatility because of long interest-rate exposure. Or, you’d have to go way down the credit spectrum. Today, you don’t have to do either. It’s a set of conditions that almost never present themselves.

Is it a better deal than you can get in the stock market?

Obviously, equities have done extraordinarily well over the last couple of years, as we’ve had massive monetary and fiscal stimulus. In a more normal world, equities could get you 15 per cent in a decent economy. As the economy slows, it’s harder to get that. And by the way, the P/E ratio for equities on the last 12 months’ earnings in the S&P 500 is more than 25 times. In a slowing economy, that sort of valuation is pretty extreme.

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Do you think investors perceive bonds differently now as a broad asset class?

I do. What we saw in 2022, everyone lost money in both bonds and stocks simultaneously. And then as inflation came down rapidly, you could do well in both bonds and stocks. So, bonds are taking on a different set of characteristics. Today, bonds provide a cushion of income. That can carry you through volatility in equities or real estate or other investments. It’s a very different framework than we’ve had for 25 or 30 years.

Is that a long-term change, or are we in a sort of transitionary period for bonds?

I’m pretty confident that this is here for the next six months to a year. After that, it’s hard to say how the world’s going to look. There are so many cross-currents around deficits, trade, productivity, automation.

With rates on the decline, do investors have to start taking on more risk to get the higher yields they’ve been getting the last few years?

If you’re in money market funds, you’ve had the luxury of taking no risk and getting a lot of yield. If you move into securitized mortgages and collateralized loan obligations, you’re taking on more risk than a money market fund, but we’re talking about portfolios that are highly rated. And they’re yielding over 6 per cent with 2½ to three years of interest-rate exposure. For a couple of decades, you never got anything close to that, unless you took a lot of risk to get there.

Does this environment call for active bond strategies, such as your new ETF, or is the average investor better off with index bond exposure?

The reason why active is growing at a much faster pace in fixed income is that there are 68,000 fixed income securities of all different flavours – different ratings, senior debt, subordinated debt, mezzanine debt, from different regions in the world, in different currencies. There’s a very high level of complexity in fixed income. The S&P 500 is just 500, and even then, we’ve had a very concentrated set of stocks driving the index. Most active fixed-income managers persistently outperform the index.