Supply-demand imbalance to weigh on US yields, says BlackRock's Rieder
GLOBAL - Low US Treasury yields are set to remain depressed for "a very long time", according BlackRock's fixed income fundamental portfolios CIO, Rick Rieder.
With US unemployment remaining "sticky" and the Federal Reserve indicating that it will maintain its zero interest rate policy into 2014, fewer and fewer commentators would take issue with Rieder's contention that yields are likely to remain anchored below 1% out to five years on the curve for the foreseeable future.
Even when the Fed begins to remove the liquidity it has injected into the economy, he said that yields are just as likely to move down as up, as it could set off a flight to quality.
But Rieder also warned against expectations for curve steepening, saying that even long-dated yields are unlikely to move very far.
"The biggest dynamic is simply the lack of supply in fixed income," he said. "We are seeing something we have not seen for at least 25 years."
For a generation, the world has been gearing-up. That led to an enormous supply of debt to the market, in the form of fixed income securities - a supply that became a geyser at the height of the credit boom.
Between 2002 and 2007, there was $1.5trn (€1.1trn) of net fixed income supply and approximately another $1trn of structured supply.
That is set to turn negative in 2012, according Rieder, who cited estimates from Credit Suisse.
"At the same time, demand will be growing, not only because governments and consumers will be de-levering, but because populations are ageing and longevity is extending at a faster rate than ever before," he told IPE.
"Every single developed country has a declining working-age ratio combined with credit-to-GDP levels of 100% or more. As the Japan situation has shown, that means less productivity, growth staying low, more dependence on fixed income and more need for yield."
BlackRock estimates the flow of investment into long US Treasury bonds from US corporate defined benefit pension plans over the next decade to be about $1.2trn.
And in 2012 alone, even if they write no new business, insurance companies will need $592bn worth of bonds.
With net US Treasury supply reducing significantly in 2012 and turning negative from financial corporations, mortgage agencies and other sources of securitised debt, the only source of stable supply will be non-financial corporations.
"The only sector that isn't de-levering is business - so the only source of supply will be in the form of corporate credit," Rieder said.
"It's becoming very difficult to construct a diversified portfolio of fixed income because of the lack of supply, with enough yield.
"Investors will relax their credit-quality constraints to allow high yield and emerging markets because they have to."