BlackRock Sees Rising Rate Advantage

Chidem Kurdas

Chattering about the effects of the expected Federal Reserve rate hike has become a media pastime. BlackRock chief Laurence Fink sounded a salutary contrarian note against the noise.

High rates are good for most long-term investors, he said, speaking at a conference call. Insurance companies and pensions, which account for some 70% of BlackRock’s fixed income investments, have been hurt by low interest rates. Higher rates will reduce the burden of their liabilities.

Pessimistic stories are told as if everybody is a hedge fund, Mr. Fink suggested. Short-term traders may indeed lose from rising rates—which mean falling bond prices. But those who hold bonds to term do not stand to make such losses.

He expects there will be more investors in fixed income, not less. BlackRock had a net outflow in the second quarter driven by money coming out of its index products, but investors are moving to unconstrained, actively managed bond funds. “We remain bullish on active fixed income,” Mr. Fink said.

Certain hedge funds that offer protection from volatility have received substantial inflows. Amid gyrations in currency markets, BlackRock currency hedge funds received $4 billion new money in the past quarter.

Separately, in a research note BlackRock says the biggest risk is a rise in the U.S. term premium—that is, the portion of the rate that compensates for interest rate risk.

At 0.4%, this premium is way below its historical average of 1.6%. “Past rebounds from low levels have been fast and furious,” according to the report.

A sudden spike could throw the economy into recession and markets into chaos. What are the odds of that dark scenario? Certainly not negligible.


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