BlackRock Inc.’s Rick Rieder says US high-yield risk premiums are not wide enough to entice investors, and that there are other areas of credit to consider allocating to.
“Part of the argument against high yield this year has been the spread’s not interesting at all,” said Rieder, BlackRock’s global fixed income chief investment officer, on Bloomberg Television Monday. “You can get yield in a bunch of other places,” he added.
His argument for passive investors is that there’s a wide dispersion of risk premiums in junk bond exchange-traded funds that track benchmark indexes. He points out that about half the supply of US junk bonds trade at spreads tighter than 300 basis points, while the rest trade above 800, leaving little in between.
European high-yield bonds are a different matter, though. “European high yield if you’re a dollar investor, you swap it back to dollars and you get paid well into the 9s,” he said. “That strikes me as fair.”
The average spread for US junk bonds stands at 376 basis points, the lowest level since April 2022, according to Bloomberg index data. Risk premiums touched 1,100 basis points in March 2020, for comparison.
“You are getting a lot of tight stuff, and you’re getting a lot of, what I would argue is, companies that are under some stress,” said Rieder. He also emphasized the importance of credit selection and choosing specific bonds that do actually pay investors for the risk being taken.
For investors looking to add credit risk to their portfolios, there are other trades, Rieder says. He sees better opportunities in AAA collateralized loan obligations and non-agency-backed mortgages, as well as parts of emerging markets and European credit.
“In fixed income, it’s pretty hard not to have the US as a core part of your portfolio,” he said. “But European credit, European investment grade credit, European high yield swapped back to dollars, you can buy a lot of reasonable companies without going far out the yield curve at an awful lot of yield particularly as a dollar investor.”
Rieder spoke with Bloomberg TV about his first ETF, the BlackRock Flexible Income ETF, or BINC, which launched at the end of May. The fund aims to deliver long-term income by primarily allocating to “harder-to-reach” fixed income sectors, such as high yield, emerging markets debt and securitized assets, according to the company.
While BlackRock is the largest ETF manager with nearly $3 trillion spread across more than 1,000 funds worldwide, BINC is the first ETF that Rieder is personally managing, Bloomberg reported in May.
--With assistance from Matthew Miller, Eric Balchunas and Michael Smith.
(Updates with more details in fourth and eighth paragraphs.)
