Economically optimistic, BlackRock's Rieder takes on more risk

NEW YORK (Reuters) - BlackRock Inc’s top bond investor has boosted risk exposure in recent weeks, on a view that the market is too bearish about chances of a U.S. recession, the Federal Reserve’s ability to support the economy and the resiliency of the U.S. consumer.

Rick Rieder, BlackRock's Chief Investment Officer of Global Fixed Income, speaks during a Reuters investment summit in New York City, U.S., November 7, 2019. REUTERS/Lucas Jackson

Rick Rieder, chief investment officer for global fixed income, said he is optimistic about the state of the U.S. economy with consumers in “tremendous shape” based on factors such as their income, household net worth and their savings rate.

As a result, “We have definitely gotten longer risk in the last 3-4 weeks,” Rieder said at the Reuters Global Investment Outlook 2020 Summit in New York on Thursday.

“I think people have all gotten into cash and have all beared-up about the world coming to an end,” he said.

Recession fears were compounded by anxiety about Massachusetts Senator Elizabeth Warren rising in the polls for the Democratic presidential nomination, Rieder added.

Warren has emerged as a front-runner along with former Vice President Joe Biden in the race for the Democratic nomination to face Republican President Donald Trump in the November 2020 election.

Some investors fret about Warren’s plans to hike taxes on Wall Street, and regulate financial services more aggressively.

U.S. stock markets sold off hard starting mid-September amid concerns about trade, politics and concerning U.S. manufacturing data. The market has recovered since and the benchmark S&P 500 index .SPX has since hit record highs.

The U.S. economy’s big services sector can continue to grow without sparking inflationary pressure for finite resources in the way that manufacturing industries traditionally could not, Rieder said.

“The consumer and services can keep the economy in good shape,” Rieder said.

As BlackRock's BLK.N top bond investment officer Rieder oversees $2.3 trillion, about a third of the New York's firm's total assets under management.

Betting against a near-term recession or further cuts in interest rates, Rieder is selling credit and buying agency mortgage-backed securities.

One way the firm has taken advantage of the market’s heightened worries about the economic outlook is by writing covered calls - selling options against stock holdings.

“We have some names that have done pretty well in some of our funds. We have been selling a decent amount of calls,” he said.

Sellers of call options take on the obligation sell shares at a fixed price in the future. It is a neutral to moderately bullish strategy that seeks to harvest income from heightened volatility levels.

Even though volatility selling has proven a crowded trade, reducing its attractiveness at the index level, the trade still had juice when implemented at the level of individual stock, he said. He declined to name particular companies in which BlackRock sold options.

Rieder also said Fed officials have done a good job matching rate cuts to economic conditions, and said he hopes – and expects – the U.S. central bank will pause from further adjustments while waiting to see if inflation starts to hit 2% or perhaps higher.

“I think they should stop now. I don’t think they should cut rates anymore from here. They should stop and get out of the way,” he said.

Rieder also said the Fed’s operations to boost liquidity by purchasing about $60 billion per month in short-term Treasuries plays an under-appreciated role in keeping the economy humming.

“You create a dynamic that’s much more important to the global economy and emerging markets than interest rates are, by a lot.”

September’s sharp squeeze in money markets spurred the Fed into providing billions of dollars in daily cash injections and has reassured Rieder the U.S. central bank is back in the business of providing sorely needed liquidity, he said.

Reporting by Saqib Iqbal Ahmed and Ross Kerber; editing by Megan Davies and Lincoln Feast.