Betting against a near-term recession or further cuts in interest rates, BlackRock's chief investment officer for global fixed income Rick Rieder is selling U.S. corporate debt and buying agency mortgage-backed securities.
Rieder, whose business represents $2.3 trillion of the $7 trillion BlackRock has under management, said at the Reuters Investment Outlook 2020 Summit that he believed the Federal Reserve had stopped its rate-cutting cycle for now.
While the manufacturing sector has been hit by the ongoing trade war with China, its contribution to U.S. gross domestic product has fallen dramatically in recent years.
He was the third speaker at the November 2019 Reuters Summit to cite the opportunities available in the mortgage market. Dan Ivascyn, chief investment officer at PIMCO, said that mortgage-backed securities were creating today's best investment opportunities.
As the Fed cut interest rates three times this year, the interest rate on U.S. 30-year fixed-rate mortgages has fallen by more than a full percentage point. That has driven a wave of refinancing that helped cheapen mortgage bonds guaranteed by Fannie and Freddie.
Andrew Hsu, portfolio manager at DoubleLine Capital, cited the opportunity in agency commercial mortgage-backed securities (CMBS). But Hsu was interested in CMBS in particular, because he believed that commercial borrowers were less likely to refinance their mortgages in a low-rate environment.
Rieder, however, believes pre-payment speeds will remain moderate. "We've seen these interest-rate levels and we think you're not going to see a pre-payment acceleration." What's more, he said he expects interest-rate volatility to remain low, which would benefit the mortgage market.
Rieder also cited the growing demand from banks for mortgage-backed products, like JPMorgan which reported significant growth in its securities business in the third quarter. Global banks earned $1 billion from trading agency MBS in the first half of 2019, a fivefold increase on last year for what industry sources say is the fastest growing revenue source in investment banking.
Finally, Rieder said that spreads in investment-grade credit were no longer interesting, and liquidity in the market was thinner than that in the mortgage market. "In a world of uncertainty, I'd rather take more liquidity and a bigger buyer base."
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