BlackRock’s Chief Investment Officer of Global Fixed Income, Rick Rieder, has expressed skepticism about market expectations for the Federal Reserve to initiate interest rate cuts as early as March, deeming such hopes premature. Rieder shared his insights on Bloomberg TV’s ETF IQ program, attributing today’s market retraction to the sell-off of Treasuries across the yield curve.
During the program on Monday, Rieder commented that the market’s response reflected Federal Reserve Chair Jay Powell’s unexpected lack of aggressiveness in signaling an imminent rate cut. Powell’s dovish tone during the recent Federal Open Market Committee (FOMC) meeting surprised Rieder, particularly the absence of a mention of the central bank’s aggressive stance against inflation.
Following Powell’s speech, Treasury yields experienced a significant drop, with the yield on 10-year US Treasuries falling below 4% for the first time since August. Traders swiftly adjusted to anticipate interest-rate cuts in the coming year.
Despite the market’s reaction, some Fed officials, including John Williams, have adopted a less dovish stance. Williams noted on Friday that it is too early to contemplate reducing borrowing costs, emphasizing the ongoing evaluation of whether policy is restrictive enough to bring inflation back to the 2% target.
In response to the evolving scenario, Rieder revealed that he is underweight in the front end of the yield curve and favors the middle or “belly” when the Fed eventually decides to pivot.
The unexpected drop in longer-dated Treasury yields has caught Rieder’s attention, and he highlighted the notable demand on the back end of the curve. He attributed this demand to pension funds capitalizing on equities’ success and locking in these yields. While acknowledging this trend, Rieder emphasized that a 30-year bond yield trading just above 4% is not particularly attractive from a historical perspective and carries “duration risk” compared to the higher yields at the front end.
Rieder found Powell’s lack of pushback on easing financial conditions to be intriguing, especially in contrast to the stance observed a few weeks ago. As the market grapples with shifting expectations, Rieder’s cautious stance underscores the complexity and uncertainty surrounding the Fed’s future policy decisions.
