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Market opportunities amid inflation, macroeconomic uncertainty

BlackRock Global Fixed Income Chief Investment Officer Rick Rieder joins Yahoo Finance Live to discuss the state of the economy, the market's reaction to debt ceiling talks, and BlackRock's new ETF.

Video transcript

JULIE HYMAN: As we just mentioned, a tale of two indexes and two big stories driving both this morning. The Dow having another down day so far. A negative close would be the fifth in a row as debt ceiling talks look for traction. And Fitch puts the US's AAA credit rating on watch. Then on the flip side, there is the NASDAQ storming higher on an eye-popping beat from NVIDIA for many the clear leader and main beneficiary of the AI boom.

The bond market, on the other hand, also responding to the uncertainty from DC. Plus the Fed's next meeting for that matter with yields up across the curve. Let's make sense of it all with Rick Rieder, BlackRock Global Fixed Income Chief Investment Officer. Rick, congrats. Recent recipient of the 2023 Outstanding Portfolio Manager award for Morningstar. In other words, people should listen to you, I think, is the bottom line. Thanks for being here.

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RICK RIEDER: Thank you.

JULIE HYMAN: I know you made some public comments recently where you talked about your relative optimism about the economy. And it seems like we have a lot of things coming at us at once, from the debt ceiling to whatever the Fed's going to do, to some of the retail results that we've gotten, and you got in video on the other hand. How do you synthesize all of that and say the economy is OK?

RICK RIEDER: When you break down the component parts, if you look anecdotally at data and you could say, gosh, it's so hard, rough beat. And by the way, if you look at surveys, and I always find, I think the markets overestimate surveys. They tend to move with sentiment like the equity market. But if you look at hard data and if you think about where we stand today, we got an unemployment rate of under three, 3.4%, you've got wages at over 4, they just revised up the excess savings in the country. I think now at $1.9 trillion.

You look at the consumer, like you were describing earlier. Consumer pulling back in some areas being a bit more prudent that there's some disparity in terms of lower income, higher income that's going on there. But if you look-- if you break down the component parts and you think about you've got a consumer that's in good shape, then it's spending.

You've got construction in this country that continues to be durably strong, you certainly see it from things that come on the back side of the IRA. You certainly see it actually at home building, see some of the home builder results has actually been solid. That's a big component and that's actually doing well today.

You're going to get some investment in CapEx and hard CapEx that's going to come down. But then you've got this technology spend that is in real CapEx dollars. So when you break it all down, you look at the component parts, economy's actually in pretty solid shape today.

If you said to me one thing that is trickier is inflation, we have an economy that's in good shape that's slowing. It's not slowing. I think the argument we're definitely going to a recession, I think, is dubious. The question is, can inflation come down enough to hit the Fed's target? And that's the one that is not clear at this point. I mean, inflation is stickier than I think a lot of people thought heretofore.

DIANE KING HALL: You talk about one headwind, Rick. Diane here by the way.

RICK RIEDER: Hi, Diane.

DIANE KING HALL: Hi. I got to ask you about another one that's immediately top of mind right now, and that's the debt ceiling debate that's happening. We've been here before. Markets don't seem as rattled this time around as they did back in like say 2011. And when you had the S&P downgrade the US credit rating, never restored it, now Fitch threatening to do that now. Should the market be taking this be more nervous than it is?

RICK RIEDER: I think the markets is taking the statements that are coming out that there will be an agreement that the US is not going to default on the debt. I think the market's taking that to heart, and like you say, has generally written off that we're going to have some tumultuous disruption in terms of the debt.

I think that's right. I generally think that-- I generally think that's right. I think the one thing that is important, and I think people need to think about, is the more that the government feels the need to continue to do this and have this debate, the dollar-- we live in a world today where it's different than it used to be.

The dollar was always the flight to quality. Let's go into dollars if there's any risk. The world is changing, deglobalization, post sanctions, et cetera. So it's something that I watch quite a bit quite frankly. I've been investing more in emerging markets because I think the persistent rally of the dollar that we saw last year, I don't think you see that again.

The emerging markets give you an awful lot of yield, and the growth in some of the emerging markets areas is pretty generous. That's to me is the part that we're spending some time on. But listen, I mean, by the way, it's not done if they come out of a room and say we have an agreement, you still got to go through votes. It's not done. I think one thing when you say markets are-- people are generally not along the equity market and certainly high frequency players are not along the equity market.

What is happening is people are along an immense amount of cash. I mean, I'd haven't seen anything like this in my career. There's almost 6 trillion sitting in money market funds. The money keeps flowing in because people are, gosh, I want to sit back and wait and you're getting paid to wait. I mean, these yields.

I mean, you talk about treasury bills last night, yesterday got to behind 7% for that short maturity. Generally, you could buy treasury bills in and around 5, getting paid to sit-in cash. And that's where people are pulling back and saying I'm going to hold a large cash position.

JULIE HYMAN: It doesn't seem like necessarily that even this debt ceiling situation would change that. I mean, we've been talking a lot about 2011. Even after the debt ceiling crisis was averted, the S&P downgrade came and people still bought treasuries. Are we going to see-- even if the most dire predictions come true, are we going to see a similar pattern this time?

RICK RIEDER: Yeah, I think people are comfortable that even if you have some breach and some form of default that you're still going to get paid. There are not a lot of alternatives in the world that are as safe as treasuries. People will feel comfortable being in treasuries, could you have, and that's part of why you're seeing.

I've never seen the spread between in literally a week's term in terms of different maturities of treasury bills. They were treasury bills, really short end treasury bills yesterday trading at 2.5%, and the ones right after the June 1 day were trading at over seven. So people are like, I'm going to manage that. But I think, generally, people feel good about owning treasuries. Listen, I think you take the government at their word that you're going to pay, they will pay principal and interest.

I think that's right. You think about the ramifications of not. Treasuries are the collateral for the way global commerce works. Dollar is the reserve currency in the world. How we build every asset valuation in the world - debt, equity, everything, or certainly on any US asset, is based on I got to know the risk free rate. Once I know the risk free rate, I can then start taking my decisions around what return hurdle do I need for other assets. Once you breach that, I mean, that's chaos. I think government officials understand the ramifications of that.

DIANE KING HALL: Rick, I want to narrow the focus just a little bit. You all launched a new actively managed ETF. What is the plan for that? How do you all plan to or expect to beat the market?

RICK RIEDER: I mean, there's a couple of things at play around that ETF. One is the receptivity of the marketplace to ETFs these days. They go into models, the people, easy access, easy exit and entry in terms of them. The one we've structured with, they're going to put a generous income on it. We're targeting a yield today. The yield is almost 7% using diversified. In fixed income, it is hard for people to say, gosh, should I buy this part of the high yield market?

I'm going to take some securitized assets which are my agency mortgages. I want safe securitized assets. Those are hard emerging markets. Where do I buy? One of the things that we think is really attractive is it diversifies, it creates a lot of yield to about getting a 7 and you can get in and out. We think we've already seen an awful lot of excitement and enthusiasm around it.

We're going to try and manage it to a generous yield for people, but diversify it, try and create balance, get a lot of yield, but then create some balance in the portfolio. I think fixed income is harder to do that than parts of the equity market because it's such-- there are so many. There are thousands and thousands of securities in fixed income. And we try and help manage that for people. What is an efficient wrapper and liquid wrapper that you can manage around.

JULIE HYMAN: I'm just looking at some of the holdings in here we were showing. Some of them, Rick. I mean, it's a big ETF. There's a lot in there to your point about there being a lot to choose from. In the fixed income market, it's interesting to me. You were just talking about emerging markets a moment ago. And you do have some emerging market sovereigns in there. I'm looking at Indonesia, I'm looking at the Czech Republic, et cetera. Talk to us a little bit more-- you touched on that earlier, why those areas might be attractive right now. Talk to us a little bit more about that, especially in the face of that dollar strength.

RICK RIEDER: First thing, emerging markets I've learned over my career. You've got to be careful and you've got to diversify them. So you'll see in any of those holdings, they're not very sizable holdings. But you look today to year Mexico, you're getting paid 10%, behind 10%. Mexico, these are about deglobalization. Where is investment is going to go in the future? Where is the US relationship going to be with China relative to the partner next door?

It is going to be a growth engine and the yields you're getting paid also parts of in EM, Mexico, Brazil. They started raising rates faster. They got the inflation issue. EM is used to excessive inflation. They get at it quickly. They got at it quickly, now they're at a closer point where they could start bringing rates down. And that from a fixed income investor, you want to be on board the train when they're bringing rates down and you're getting paid to be there.

There's another part of EM today that's attractive is you can benefit from-- again, you've got to manage the risk but you can benefit from those yields coming down and being generous today. And their currencies can improve. And you're seeing that certainly played out Mexico has been extraordinary in terms of how much the currency is improving. I think it's part of that we feel good about where they're going to be longer term in the geopolitical sphere.

Anyway, I'd like to say, I don't think we're never going to overdo it emerging markets in a fund like this. Because listen, EM is always subject to change in global growth dynamics, but the diversified get in the right parts of EM, or at least what we think they are today, I think, is a good way to manage it.

DIANE KING HALL: EM certainly also has to deal with certain political issues in certain countries. And Rick, one-- exactly. One unrelated question to all of this. Did you still get up at 3:45-- do you still get up at 3:45 in the morning?

RICK RIEDER: Yes, ma'am.

DIANE KING HALL: OK, you beat me.

RICK RIEDER: That is--

DIANE KING HALL: I used to.

RICK RIEDER: I have a-- I have a hoop band that measures your sleep and measures--

DIANE KING HALL: How much sleep do you get?

RICK RIEDER: I get a little over four hours a night. A lot of energy. There's a lot to do.

DIANE KING HALL: Doctors may have something to say about this, but I'm not one. All right, I'll leave it there.

JULIE HYMAN: But he always brings the energy for us.

DIANE KING HALL: Exactly.

JULIE HYMAN: I love it.

DIANE KING HALL: Always the energy. Clearly well caffeinated as well. All right. All right. Thanks to Rick Rieder, BlackRock Global Fixed Income Chief Investment Officer.