Latest / UBS Trending / Increasing rates. Is it 2007 all over again?

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Increasing rates. Is it 2007 all over again? · UBS Trending

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Trillions of dollars are sitting in cash.
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Treasury yields are at record levels.
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AI is fueling a borrowing boom,
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and investors are asking one question
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where are the opportunities now?
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BlackRock's Rick Rieder
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joins us with his latest
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outlook on the markets and more right now on UBS Trending.
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Hi, everyone, and welcome to UBS Trending.
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I'm Anthony Pastore.
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Thanks for joining me today.
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Very excited to welcome back to the studio
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Rick Rieder from BlackRock.
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By the way.
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He is also a member of our Research Advisory Board here at UBS.
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And that is a group
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of experienced market leaders
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and industry experts who collaborate with UBS as Chief
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Investment Office to explore
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the key themes
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driving markets, the economy and long term investing,
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and that board's
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perspectives help
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broaden the conversation around today's
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most important investment topics
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and bring very valuable insights to UBS clients and advisors.
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And Rick is one of those members.
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Rick, good to have you back.
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Great to see you, my friend.
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It's been a while. I'm glad to be here.
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And by the way, you're here
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on a really interesting and auspicious day for the bond markets
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as we're sitting here.
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The 30-year Treasury yield is at 19 year highs.
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2007 was the last time we saw these
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levels of 5.32, 5.31
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Just before we get started,
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because this will probably lead us into the rest of our chat.
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What do you attribute this extreme rise in yields
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in the long end of the curve?
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So I it be better off like the people,
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the equity people get to come in and say it's all time
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highs and record highs
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like it's like the cheapest time in the bond market.
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So let's say I know a couple things that have been,
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that have been happening.
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And I, you know, listen,
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I think there are a bunch of
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people
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who put stories to what's happening
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that I don't think are 100% true.
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One, I actually think if you think about when the fed met last,
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employment has actually been sluggish.
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Inflation has actually moderated.
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So I don't really think this is
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gosh, Fed's going to be hiking hiking dynamic at play.
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I do think there's something that is significant though.
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And that is the the fact the amount of financing that's coming to
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the market is pretty impressive.
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So you've got Treasury issuance, you've got a fiscal dynamic
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that's quite real, and then you've got this immense amount of
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AI data center supply that's coming on the market all at once.
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And by the way, when rates move higher
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you get mortgage rate extension.
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And so all those things
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have led to just more supply to the market.
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So I think it's a supply demand dynamic.
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We also historically
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you had much greater contribution from other parts of the world
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who were buying our treasuries, China, Japan, Brazil,
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other parts of the world.
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And quite frankly,
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they're funding their own domestic and and and or buying gold.
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And so you have you don't have the buyer base isn't as extensive.
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People have pulled back saying,
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gosh, I'm going to wait a little bit.
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Treasuries don't do for me
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what they used to do for me in terms of,
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gosh, they're a great hedge against equities.
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Particular
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if inflation's higher means equities
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get hurt the same time that bonds do.
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So listen I think it's primarily a supply.
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But I listen
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I think people have also gotten a sense
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for gosh long and interest rates.
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What do how do they fit my portfolio today.
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And you don't have the buyer base you had before.
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It's interesting because, you know,
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we're obviously talking a lot about artificial intelligence,
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and I want to get into that with you in a little bit
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on the debt issuance side, because corporate debt,
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it's really getting fueled a lot by what's going on AI side.
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But I want to keep with the rates,
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you know,
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because we just as you mentioned,
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Warsh had a meeting a couple of weeks ago.
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He talked about periods of watchful thinking.
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When they talk about why are you going to raise rates now?
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The market thinks he's
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they're going to raise rates for the end of the year.
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CIO here at UBS doesn't think that's going to happen.
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They expect probably two cuts next year.
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What are your thoughts on
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that when you tie it into jobs inflation,
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all the things that contribute to
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what the fed has to think
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about every time they go into a meeting.
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And I by the by the way,
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not a lot of people believe exactly like you described.
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I think the same. Yeah, I think it's crazy.
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I mean, I think hiking rates when you're looking at, by the way,
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if you take
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I think we brought a chart to show the where inflation is going.
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If you take the three month moving average of core CPI,
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we're running at 1.6%. Yep.
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The six month moving average is 2.4 core goods inflation,
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where I would argue
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the interest rate is the most influential on core goods
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inflation is running literally at zero.
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You have service level inflation,
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but even service level inflation is not running that high.
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So I mean look at this chart.
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Say gosh the fed is going to hike into this.
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It doesn't make a lot of sense to me.
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And plus, you know, when the employment world
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we've hired the length of three months, we've hired 20,000 jobs.
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If you strip out health care, it's a negative. Right.
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And if you go back six months, the same dynamic,
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meaning I don't think the fed should be hiking.
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I agree, I think the next move is going to be a cut.
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Like you say, markets are anticipating a hike.
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You have a hawkish committee.
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I will say one thing about it.
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I think, you know, I get asked all the time fed credibility.
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Also, I think they need to give the new chairman a chance.
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I think he's got these sass forces.
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I think he's going to lay out what are those task force?
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These are complex issues.
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Is policy restrictive?
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I don't know, housing seven a tough time.
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AI is going to keep spending.
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And by the way,
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what is the most effective tool is the interest rate
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or is it liquidity or is it a balance sheet? Is regulation.
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So I think he's going to work through a bunch of these issues.
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The one thing that I think will be critical
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going forward, I think Jackson Hole could be an important moment.
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Yeah, that's coming up really soon. Yeah.
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And I think that will be at the end of this month.
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I think that will be what are the metrics you're looking at?
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What are the tools
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you're using to analyze inflation,
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analyze these complex subjects.
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And I think if he can give a little bit more clarity
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on the metrics,
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which by the way, doesn't mean forward
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guidance, people are freaked out.
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We're going to go less forward guidance.
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Actually I think that's a great thing.
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I think the markets have become too married to, quite frankly,
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the dot plot where forward guidance has been wrong.
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Think about transitory.
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You think about you know, you think about economic projections.
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The fed hasn't been right.
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I don't think we need as much forward guidance.
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Markets just need give me the metrics.
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Give me the tools that you're going to utilize to assess the,
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what you're thinking about in terms of inflation employment.
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And I think Jackson Hole could be a time to that.
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And if you got more clarity around it, you could see rates
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start to stabilize and rate volatility
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come down, which is also important.
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And maybe the markets will start pricing in a cut.
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Oh in 2027
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I mean there's only so much
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they can anticipate
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that they're going to hike before the end of the year.
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And given that also I mean look at
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I mean there's
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something like $8 trillion of cash and money market
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right on the sidelines globally.
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So people are missing out on this opportunity to look at I mean,
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if you want duration, you've got it 5.3% on a 30 year Treasury
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or 20 years, or just like,
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I think a like one basis point below that, even the German Bund,
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yeah, is at high levels since we haven't seen since 2011.
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So which where would you be putting some of that money to work?
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So I think today I still think we'd be a bit careful
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about long end interest rates.
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And I think, you know,
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we've kept our interest rate exposure to a pretty nominal level.
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Income really work.
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So I didn't
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I think when you go back and you say, you know,
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I think two years from now, three years from now,
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people are going to say, "Wow,
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I got to buy assets like we run an ETF called, Bink."
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We're running close to 7% yield on the portfolio
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with less than three years of interest rate exposure
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and an A-minus rating.
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I've spent most of my career longing to do something like that.
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Creating income.
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You don't have to take as much interest rate exposure.
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I think to me, that's that's what you got to do.
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And by the way, Europe is super.
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To your point about bonds, Europe is super attractive.
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You think about we had years of negative interest rates
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now as a dollar investor you get the cross currency benefit.
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You know we buy I hold the largest percentage
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of European fixed income that I've ever there have ever owned.
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And by the way, emerging markets are if you don't think
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the dollars in appreciate significantly,
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which I think is a fair assessment.
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Yeah. Make some sense.
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So you know my view today
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diversify diversify diversify fixed income
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equities are different.
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Focus concentrate I these stocks are going to continue to do
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well in fixed income.
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I'm trying to be as boring as humanly possible.
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And diversifying.
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Just keep the thing stable with a lot of yield
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so people can sleep at night.
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It's funny most of the time
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and our
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and most of my career,
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maybe yours fixed income was kind of a boring asset class.
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It was stable and stable,
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and it's actually really exciting these days
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given everything that's going on.
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But and that takes us to the AI side of the story,
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it almost feels like the bond market,
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especially on the corporate bond side,
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is having a little bit of a renaissance
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because there's so much potential debt
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that's being issued from a lot of these AI companies.
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On the corporate bond
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side,
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it's giving investors a real opportunity to kind of get in here.
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Do you think that that's
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where
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we should be thinking about as far as like long term planning?
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So I've historically always been a believer in technology.
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You should own in an equity.
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Yeah. Like bonds we should be a little more safe.
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And you know utilities telecom on cetera.
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Industrials today I think you have to reassess
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your model
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a little bit and say gosh
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maybe I will finance some of these companies.
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You know, some of the data center financing that's coming.
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That's two,
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three, four year debt that's get you some really nice yields.
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What I pick away at some of that for sure.
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Some of the,
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you know, some of the hyperscaler issuance out the curve.
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The yields are pretty high today.
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That being said,
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I don't think there is
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any race because they're going to keep coming to the market.
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So I think today I still think I equities
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technology equities I think you're upside is is tremendous.
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What I start picking away at some of particularly
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some of the shorter dated a data center debt I think so.
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And then listen I, I think it's own part of your portfolio
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in some of the hyperscalers maybe maybe a bit of it.
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I just don't find like we got to race into long duration
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technology debt.
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I just don't think there is an emergency that we get in there.
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There's plenty of ways
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to get yield in the portfolio,
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and I'd be a little bit more careful today on that side.
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Is there a risk that that, you know, spreads need to kind of a
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just a little more widely at this point?
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Listen, I think there's a lot of I mean, I've, I quite frankly,
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I've seen industrial, I've seen how many different cycles
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and you see industrial development,
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you see like the telecom issuance that was sizable.
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This is really big.
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This is really big.
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And I think part of,
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you know, whether you talk to people
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in administration or otherwise,
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like why are these rates doing this?
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Like we got to reprice real rates
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to the point where we're going to finance a lot of it.
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And there's something that it's not just the amount
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and there's is something that's really different there.
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The IRR, the returns on their investments.
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Yeah.
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That 2550 basis points doesn't really make a hill of beans
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of their weighted average cost of capital.
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So as long as their IRR is are so high
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they can issue a cheaper levels and so on.
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The you know
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from the bond side over in the investor side you say okay,
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maybe I'll be a little bit careful about it
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because it's not only going to come,
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but it's going to come at levels that they just need size.
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Right.
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And they're willing to price in of that size.
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And it potentially everybody wins in that scenario.
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Correct? Yeah. Correct.
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You just as an investor,
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you just got to wait for the deals that make a lot of sense
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that have already priced in like, wow, that's a lot of yield.
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I've already factored in the supply that's going to keep coming.
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What do you.
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Think about the intermediate part of the curve right now
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that, you know twos five especially the five year
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we like it here.
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I mean the CIO really likes that five year.
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It's about 4.39 right now,
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which is an unbelievably good yield for 5-year.
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Where do your thoughts on that given you know,
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I mean five years intermediate.
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That belly is not much of a belly now.
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But yeah, I hate to be that agreeable, but
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that's my favorite part of the curve. Yeah.
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By the way the very front it carries a well in a portfolio,
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the very front.
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You know, it's pretty hard to fight
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now where you're pricing the fed giving.
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You got a hawkish committee.
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But the belly if you think about where forwards are going to go
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and you can actually get some real price return
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if they do flip, which
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I think they will to an easing posture,
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you can actually make some money in the belly of the curve.
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I like I don't like it, I like the belly.
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I like owning the belly of the curve
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and then owning some yielding assets spread to that.
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Sure.
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And that to me, by the way, you run your break-evens of owning
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that you'd need rates literally if you're owning spread assets
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would be assumed.
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Default cycle is
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is reasonably low, which I think is right away from loan.
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Some parts of the loan market
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before your break even, you need rates to go up 75 to 80, 85 basis
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points to be down on those trades.
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I don't think we're going there.
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So the break even relative to cash I've been in
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that belly is pretty, pretty attractive today.
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And a well-diversified portfolio of equities.
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Some it's got some like
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little bit of commodities in there and the fixed income.
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You know.
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Great way to think about especially right now in this market
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I can't let you go
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because one of the one time I did
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have you in the studio
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and I forgot to ask you a question
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about what
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your latest
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and greatest technological sort of aficionados
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brain is thinking of.
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I'm going to ask you,
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what's the latest and greatest tech
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that you're geeking out these days?
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I mean, I,
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I mean,
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so first of all, like things like robotics,
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I need to have my own robot.
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In the House.
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Yes, I do, although I got to figure out the one that's not,
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you know, fully, you know, listening and everything in my life.
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But anyway, I gotta figure that.
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I gotta figure that one out, right?
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I by the way, I'll say the two things that are really cool.
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First of all, full self-driving.
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And this is part of why I'm a little wigged out
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about employment in this country, etc..
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The full self-driving cars are crazy, you know,
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like you literally don't even have to pay attention.
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Like they are literally. I mean, I'm not advising that.
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But anyway,
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they're pretty incredible in terms of, that that blows
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me, blows me away now and then, the one that I think
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that I'm getting into now, I
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don't think the technology's there yet,
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but I think we're not more than a few months away
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is I think the glasses and I know Meta's talked about it.
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Google talked about it.
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Apple has gone down the road
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and I think maybe stopped and started around but boy,
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I think
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I think, you know, when you think about what mobile telephony is
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and, and the adjacency around glasses
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and things that can happen around glasses, some of it's
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virtual reality that is, that's pretty extraordinary, right?
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Yeah. Somebody told me the story.
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You could at
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some point
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were going to be sitting at dinner,
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and you'll have people sitting at the table
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that actually won't be there,
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because you'll see them on your glasses,
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which I've said, I don't think the restaurant's
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going to love that, but only one person's eating.
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But, anyway, I think glasses is going to be,
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you know, optics, generally optical generally.
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I think it's going to be a pretty powerful dynamic.
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It's funny you out my my producer
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Kyle is in my ear saying,
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you know, it's almost like every time
13:46
you watch a Black Mirror episode, you can almost anticipate that.
13:49
We'll see that device in our own lives
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in the next 10 or 20 years, maybe the last two years.
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It's exponentially.
13:55
Yeah. That's what that's.
13:57
What makes it so cool today. Yeah.
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And you can invest around some of these. Exactly.
14:00
We love,
14:01
the AI investing here are transformational opportunities.
14:05
Very cool.
14:05
Great stuff Rick. Always a pleasure.
14:07
I feel like I can talk to you for you forever.
14:10
So thanks for coming back. Sure.
14:11
I appreciate it. Great to see you. Rick Rieder from BlackRock.
14:13
Thank you all for joining us.
14:14
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And as always,
14:38
if you have any questions about what
14:39
Rick and I spoke about today, please
14:41
make sure you continue this conversation
14:42
with your financial advisor.
14:43
Until next time, I'm Anthony Pastore.
14:45
We wish you a great rest of your day, everybody,
14:47
and remember to keep your eyes on what's trending.
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We'll see you soon.