Where BlackRock’s Rick Rieder sees opportunity right now

There’s a lot to like right now in the fixed income market, according to BlackRock’s Rick Rieder. The best part is investors can still scoop up some great yields and not have to take any big risks to get them, he told CNBC. “I don’t take a lot of interest rate risk. Buy a lot of high-quality yield, compound it and sleep at night,” said Rieder, the firm’s chief investment officer of global fixed income. He also manages the BlackRock Flexible Income ETF (BINC), which just celebrated its one-year anniversary. It has a 30-day SEC yield of 5.95% and net expense ratio of 0.40%. BINC 1Y mountain BlackRock Flexible Income ETF’s one-year performance While investors can get higher yields if they wanted to take on more risk, Rieder cautioned against that. The second half of the year is always more volatile, plus we’re heading into election season, he said. “If you wanted 8(%), I think you’re being greedy, and arguably irresponsible to try and get that additional yield,” said Rieder, who was named Morningstar’s outstanding portfolio manager of 2023. Yields began rising when the Federal Reserve started raising interest rates in 2022. Bond yields move inversely to prices. The central bank paused its hikes in 2023 and is now waiting for data to show inflation has subsided enough before it starts to cut rates. Officials are concerned over the lack of further progress in bringing down inflation, the latest Fed meeting minutes indicate. Meanwhile, Fed Governor Waller on Tuesday said that he will need to see “several months” of good data before voting to decrease rates. Rieder thinks a rate cut could possibly come as soon as September, depending on the data. As the Fed cuts rates, bond yields are expected to fall. “I really think the Fed wants to get a couple of cuts done this year,” he said. “They’re going to get a window to get one or two done.” What Rieder finds attractive One of Rieder’s top picks right now is AAA collateralized loan obligations . The assets are securitized pools of floating-rate loans to businesses, and they generate interest for investors. The spreads are still pretty wide and the yields are upwards of 6.5%, he pointed out. “Think about your ability to compound return at 6.5%, for round numbers, on a triple-A asset,” Rieder said. “I’ve been doing this for over 30 years. That doesn’t happen.” The BlackRock AAA CLO ETF has a 30-day yield of 6.75% and an expense ratio of 0.20%. CLOA 1Y mountain BlackRock AAA CLO ETF’s one-year performance Within U.S. high-yield, he likes single B-rated bonds. Investors can earn some income, but generally defaults aren’t an issue, Rieder said. He’d stay away from C-rated bonds because he thinks defaults in the that area are going to rise. He finds European credit, both investment grade and BB-rated high yield, attractive in part because of the strong U.S. dollar. “Then I would layer in some quality investment-grade agency mortgages,” Rieder said. “Don’t go out the yield curve on it — two to three year duration — and then keep your credit quality in a good position.” MBB 1Y mountain iShares MBS ETF’s one-year performance BINC’s latest strategy Of course, he’s putting that strategy to work in the BlackRock Flexible Income ETF, which seeks to stand out with a multisector approach that balances high quality and high yield. The fund launched May 19, 2023 and now has more than $3 billion in assets. In December, Morningstar named BINC one of the best new ETFs of 2023 . It has an average rating of BBB+, according to BlackRock. The team has cut the interest rate exposure, with the ETF now sitting around a 2.25-year duration versus its previous 3-year duration, Rieder said. They have also added high quality CLOs and high-quality European securitized assets. The fund has 31.6% of the portfolio allocated to securitized, with 11.3% of that in CLOs, 6.2% in asset-backed securities, 9.6% in commercial mortgage-backed securities and 4.4% in non-agency MBS. The fund’s exposure to high-yield corporates has been slightly reduced to just under 40% of the portfolio from the 43% it held previously. Some 21% of high-yield corporates are U.S., while 18% is European and British. Meanwhile, BINC’s exposure to emerging markets remains moderate. “We’ve added a little bit recently, but we’re still staying conservative EM,” he said. His strategy appears to be paying off. BINC has outperformed, bringing in a total return of 8.35% since its inception, as of May 23. It’s one-year total return has landed it in the top quartile among its peers, according to Morningstar . “We’re getting more yield than BB high yield. We’re getting almost as much yield as full high yield — and our volatility is 60% of that market, just because we diversified,” Rieder said. If investors stay within higher quality, they’ll be able to ride out the volatility expected into year end, he said. “We’re moving into a more illiquid period,” he said. “Returns have been pretty good so far. Manage your volatility, keep your liquidity in a good place and then, just carry a good return into year end.”