BlackRock, the Chief Investment Officer for Global Fixed Income, stated in an exclusive interview with CNBC that although investors may be concerned about the volatility in certain sectors of the current bond market, they are facing a "historical" opportunity in high-quality credit bonds to lock in attractive yields.
He stated that, in theory, investors can now construct a diversified investment portfolio that achieves a yield of over 7% with a duration of less than three years and an average credit quality of A-. Duration is a measure of a bond's sensitivity to interest rate fluctuations, and bonds with shorter maturities typically have lower durations.
Rieder said when discussing the fourth-quarter outlook released on Wednesday: 'Not only are these yields historically significant at their current levels, but such yields usually only occur when there are certain problems, such as economic issues or default problems.'
He stated that this is not the case at present, and the economy is still strong. "So you actually don't have to worry about any major defaults occurring."
Rieder does not specify which credit bonds are included in the aforementioned combination, but iShares Aaa - A Rated Corporate Bond ETF ( QLTA ) has a 30-day SEC yield of 5.68% and an effective duration of 6.48 years, which is higher than the low-duration strategy emphasized by Rieder.
Managed by Rieder, iShares Flexible Income Active ETF ( BINC ) has a 30-day SEC yield of 5.66% with a three-year effective duration, but its investment portfolio is not limited to investment-grade credit bonds.
The best opportunities are with hyperscale cloud service providers.
Rieder believes that the best current opportunity lies in investment-grade corporate bonds, and he noted that "it's been a long time since I've said so." Standard & Poor's and Fitch define investment-grade bonds as AAA to BBB, while Moody's defines them as Aaa to Baa3.
This includes bonds from ultra-large cloud service providers. As these companies have accelerated the construction of AI infrastructure, they have issued a large amount of bonds in the market this year. According to LSEG data, as of October 20th, Alphabet, Amazon, Meta Platforms, and Oracle have collectively issued approximately $228.4 billion in bonds this year.
Rieder said when talking about these ultra-large-scale cloud service providers: 'Their leverage ratios are very low, and they also have abundant cash flows. What you are buying now are these higher-quality entities, and the price you pay to obtain these yields is very attractive.'
iShares, managed by Rieder, has increased the allocation of investment-grade corporate bonds to 14.3% of the portfolio, compared to 8.5% in July.
However, he advises investors to remain patient and continue holding their positions, as interest rates may still rise further in the future.
He said, "Your starting point is almost the best benchmark for judging returns. So if you get 7.25%, it might turn into 8%, or maybe it might become 6%, but... if your holding period is one year or longer, then that rate of return is what you will actually receive."
He also warned that investors should remain cautious beyond investment-grade credit bonds, as these require stronger screening capabilities and in-depth research, which also includes targets related to AI.
"Some parts of the data center supply chain do not have the guarantee or support of ultra-large cloud service providers," he said. "We have always been more cautious with these parts, and we will continue to be so in the future."
As investors become increasingly concerned that some companies are taking on excessive debt to build artificial intelligence, the bond market, particularly high-yield credit bonds, has recently been impacted.
Junk-grade CoreWeave has become a typical case, with its stock price falling, bond yields rising, and credit default swap spreads widening. Oracle, which is at the lower end of the investment grade and is considered a barometer for the broader AI market, has also been affected to some extent.
Follow the Federal Reserve
Rieder is also paying attention to the Federal Reserve. The market expects that, in order to combat inflation, the Fed will raise the federal funds rate again in December. According to CME Group's FedWatch tools, the market currently estimates that the probability of the Fed raising interest rates at that time is close to 90%.
This fund manager expects an interest rate hike to occur, but he does not agree with it. He says that higher interest rates are harming certain sectors of the economy, such as housing, while having little impact on other areas, such as the capital expenditure of technology companies, which has become an important driver of growth.
“They don’t borrow at the overnight federal funds rate,” said Rieder. “There is a large amount of floating-rate financing in housing, credit cards, and auto loans, and you can already see pressure in these areas.”
He added that the market is currently pricing the impact of AI entering the market, and this pricing will continue.
Calculate risks in advance
Rieder believes that there are still several potential risks ahead, including the rising level of global government debt. In the United States, the budget deficit for fiscal year 2026 has expanded to $2 trillion.
"The more the central bank raises interest rates, the more we need to be cautious in the long term regarding the debt costs borne by these already heavily indebted governments," he said.
He also stated that the bond supply from AI company should also be taken into consideration.
"As a large amount of supply floods in—data centers, hyperscale cloud service providers—there will be a certain crowding-out effect," he said. "As government interest rates rise, this is also something we must continue to monitor closely."
At the same time, Rieder indicates that he will continue to enjoy the returns brought by high-grade investment-grade bonds, “and then smile a little more.”
