Rick Rieder – The Fixed Income Outlook for 2017

This article is part of our Schwab IMPACT 2016 Special Coverage this week. More articles are listed below.

The Fed will raise rates in December, as long as the election goes as expected and there are no surprises in the economic data, according to Rick Rieder. But, Rieder said there are secular influences in the economy that are much more important than monetary policy.

Rieder is a managing director and the global chief investment officer of fixed income at BlackRock. He spoke yesterday at the Schwab IMPACT conference in San Diego. It is the industry’s largest conference, with approximately 2,000 advisor attendees.

Rieder also expects the Fed to execute two rate hikes in 2017 and another three in 2018. That will be “really powerful” for the yield curve, he said, which he predicted will steepen. Indeed, he said the value is in the “belly” of the yield curve – where investors can capitalize on rising short-term rates.

He said his forecast is based on a prediction that the Fed will allow inflation to run “hotter” than its current level of approximately 2%.

Looking back at 2016, Rieder said the year can be parsed into four segments, punctuated by three key dates. The year started with a risk-off framework driven by concern over China and a fear of capital flight from that country. The second segment began on February 15, when a governor from the People’s Bank of China said that the country was going to grow instead of pursuing structural reforms. With 50% of global growth coming from China, that statement triggered a positive investment sentiment. The third was the Brexit vote on June 23, and Rieder said the data on the U.K. looked “okay” so far. The fourth was on September 21, when the Bank of Japan made the decision to move off of zero interest rates, letting its yield curve steepen and inflation run hotter. It recognized that a zero-interest rate policy was hurting pensions, insurance companies and banks.

Looking forward, Rieder said we live in a world of big data, but we focus on “small data” like CPI, GDP and employment. “The influences on the economy are much more complex and much of the data we get is wrong,” he said.

Unique secular influence

Two forces – demographics and technology – are shaping the economic landscape and make the current environment unique, according to Rieder.

Globally, we are facing an unprecedented demographic cycle as the population ages, he said, most evident in Japan, which is shrinking. “That is the most important force we face,” he said, “economies grow when the working-age population grows.” Output consumption is tied to that age cohort.

Given our aging population, Rieder said that 2% growth is “pretty good,” especially when you consider that Europe is at 1% and Japan at 0% because of demographics. Interest rates will stay low because the demand for income among retirees is extraordinary and will be long-lived, according to Rieder. He said that demand for U.S. securities is driven in part by foreign investors, who want our higher interest rates.