(Bloomberg) — BlackRock Inc. Rick Reeder, chief investment officer for Global Fixed Income, said the cooling job market supports expectations of a rate hike by the Federal Reserve, making bonds more attractive than they were months ago.
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As U.S. hiring began in August, a Labor Department report showed wage growth slowed and the unemployment rate rose to its highest level since February 2022, the month before the central bank begins tightening monetary policy.
“I think you can use that as another benchmark because we’re seeing weak construction in the labor force,” and “it comes with inflation,” Ryder said on Bloomberg Television Friday. “The Fed has to be done. They can put their shoulders back more than they have seen in the last few months from interest-rate exposure.”
The two-year Treasury yield fell as much as 11 basis points to 4.75% before ending tapering, although bond traders were pricing in less than a 50% chance the Fed could raise rates again in this tightening cycle. Long-term yields initially dipped but soon rebounded 7 basis points above the 10-year at 4.18%, moving up the curve, although it remains inverted as long as long rates remain below short-term yields.
“We like to hold the front end,” he said, “If you buy commercial paper, you get paid, etc., at about 6%. It was incredible. But I think now you can extend that a little bit further than the curve,” and “We’ve been adding some to the belly of the curve.”
U.S. money-market mutual funds are on pace to make more money in 2023 than any other year as investors hold yields more attractive than bank deposits, JPMorgan Chase & Co. said. The seven-day yield since Aug. 30 has averaged 5.16 percent, according to the Crane Data LLC index, which tracks the 100 largest U.S. money funds.
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The swaps market is now pricing in the possibility that the US central bank will begin easing policy with a quarter-point rate cut in May. Rieder sees that as a possibility, but said such a reduction would happen a little later next year. Still, in 2010, The Fed’s privot rate cut in 2024 is part of what makes Treasuries more attractive, he said.
“I’d definitely rather be in the front than the belly,” Rieder said. But “it’s not crazy to keep a ten-year diary. Can you go to 4.25% or 4.5%? It is certainly possible. Duration, when do you want to add more interest rate exposure? When you think the Fed is now moving into a further easing cycle.
He added that BlackRock bought the 10-year notes “recently.”
Swap dealers are pricing the effective fed funds rate, which ended this year at around 5.4%, will fall to around 4.2% by the end of 2024.
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