Bond investors may be betting too aggressively on 2024 rate cuts, says BlackRock

By Davide Barbuscia

NEW YORK (Reuters) – A year-end rally in U.S. government bonds has potentially limited further gains in some Treasury maturities, said Rick Rieder, chief investment officer of global fixed income at BlackRock, the world’s largest asset manager.

U.S. Treasuries have bounced back from a severe sell-off over the past two months on expectations the Federal Reserve will start cutting interest rates next year as inflation cools and the economy slows. But market bets that the Fed will trim rates by 150 basis points starting as soon as March are overdone, Rieder said in an interview.

The Fed’s economic projections, published earlier this month, projected 75 basis points of interest rate cuts next year.

“To achieve what the market is pricing in, you’d have to have a pretty significant deterioration in some of the indicators like labor, and we don’t we don’t anticipate that,” he said. “I think there’s been this persistent skepticism about the U.S. economy, which I think is overdone.”

Rieder believes that Treasuries at the extreme short and long ends of the yield curve are unlikely to see more meaningful gains after their rapid appreciation of the last several months.

“Much of the 2024 return for the very front end and for the very back end, I think, has already been achieved,” he said.

Benchmark 10-year Treasury yields, which move inversely to prices, have declined from over 5% in October to less than 3.9% this week, and 30-year bond yields have fallen by about 100 basis points from their October highs.

Rieder expects rate cuts of 75 to 100 basis points next year starting in May. Certain parts of the Treasury curve, such as bonds with five- or seven-year maturities, are set to benefit the most from the cuts, with five-year yields possibly declining by 50 basis points or more, he added.

He has moved the interest rate exposure of the BlackRock Flexible Income ETF away from short-term debt and more into the so-called belly of the Treasury curve. The duration of the BlackRock Total Return ETF, which he also manages and which was launched last week, is of about six years, he said.

(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Jonathan Oatis)