Play defense ahead of Fed rate hike: BlackRock Strategist
July 30,2015
Investors should play defense heading into the expected Federal Reserve interest rate tightening cycle, BlackRock’s Jeff Rosenberg said Wednesday.
“We’ve been very cautious on fixed income overall,” the chief fixed income strategist told CNBC’s “Squawk Box.” “One of the issues going into the summer was we saw valuations across the spectrum in fixed income not really reflecting a lot of the risks, particularly on the credit side.”
Deflationary fear is setting in following a commodity price shock and in the face of concerns about China’s continued growth and contribution to the global economy.
“That’s really impacted credit markets. We came in with that risk showing up—and really the risk of the Fed—saying you want to be defensive going into the Fed rate movement,” he said.
Global fixed income exposure will become more important as monetary policy around the world diverges, with policy easing in some regions as the Fed tightens at home, he said. The slowdown in China, for example, will create pressure on the reserve banks of Australia and South Korea to lower rates.
“Using FX-hedged global interest rate exposure, that allows you to get better exposure outside of the U.S.,” he said.
BlackRock’s picks include securitized assets and inflation-protected bonds, which look attractive as inflation normalizes, Rosenberg said.
The firm is neutral on U.S. Treasurys and bearish on high-yield debt, banks loans, agency mortgages and corporate bonds.
Despite some potential deflationary concern, Rosenberg said he believes the Fed will begin raising rates in September. Otherwise, the central bank risks having to increase rates more quickly than it would like, he said. That’s because monetary policy operates on a lag, and the Fed could find itself behind the curve if it holds off.
Fed policymakers will issue a statement at 2 p.m. EDT Wednesday at the close of its two-day monetary policy meeting. Market watchers are not expecting them to raise interest rates until the September meeting at the earliest.
The CME Group’s FedWatch Tool, which measures daily market reaction to the probability of a change in the fed funds rate, puts the chance of a rate hike at 17 percent in September, 34 percent in October and 53 percent in December.
