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NEW YORK (Reuters) - Top BlackRock Inc bond investor Rick Rieder on Wednesday said tax cuts would help the U.S. economy withstand even sharply higher interest rates.
"Monetary policy has taken a backseat," Reider, BlackRock's chief investment officer of global fixed income, told Reuters after the Federal Reserve raised rates for the first time in a year. "The focus is completely different today."
Rieder said he has sharply tapered his exposure to short-term government debt and is favoring U.S. corporate debt that pays much higher yields.
Yields on shorter-dated Treasuries hit their highest in more than five years on Wednesday while the dollar rallied and stocks fell after the Fed raised rates, as expected, and signaled a faster pace of hikes in 2017. [MKTS/GLOB]
"It was clearly more hawkish than markets would have anticipated," Rieder said.
Ten-year Treasury yields could move from 2.58 percent to the low 3 percent range in 2017, Rieder said, and he has already trimmed exposure to longer-term government debt.
A further move up in rates of 0.50 percentage points could start to create a drag on the economy, but that economic hit could be offset easily by tax cuts.
He said if rates moved up by 100 basis points but U.S. personal income taxes were cut by 5 percent, the tax cut would have a bigger impact on the economy, citing BlackRock research.
"That certainly would soften any blow," he said, as would solid economic growth.
That means central banks have receded in importance, compared with government spending policies.
"Risk assets and commodities are focused on the forward growth trajectory," he said.
Rieder laid out a more positive post-hike outlook than what happened after the last rate increase in December 2015.
After that move, S&P 500 stocks sold off by nearly 12 percent. Bonds and commodities also fell until the market bottomed this February.
Rieder is looking for buying opportunities in lower-grade U.S. corporate debt, which he sees as a safer bet than other high-yielding assets, such as emerging market fixed income.
The markets are offering an opportunity to make those purchases. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG), an exchange-traded fund that tracks the lower-grade corporate market, fell nearly 0.8 percent on Wednesday.
Other investors are veering away from that market. Junk bonds will drop into a "black hole of illiquidity" if the 10-year Treasury yield exceeds 3 percent next year, DoubleLine Capital Chief Executive Jeffrey Gundlach said on Tuesday.
Reporting by Trevor Hunnicutt; Editing by Steve Orlofsky and Meredith Mazzilli