BlackRock fixed income CIO: High-rated credit bonds now have a “historic” opportunity; hyperscale vendor bonds are the first choice

The Zhitong Finance App learned that although some sectors of the bond market are experiencing fluctuations, causing investors to be wary, BlackRock's Global Fixed Income Chief Investment Officer Rick Rieder (Rick Rieder) said that investors are facing a “historic” opportunity to lock in impressive yields in high-quality credit bonds.

Reed said that from a hypothetical perspective, it is now possible to build a diversified investment portfolio with a yield of more than 7%, a period of less than 3 years, and an average credit quality of A-. The long-term term measures the sensitivity of bond prices to interest rate fluctuations. The shorter the term of a bond, the lower the term.

“Not only is this historic at the level of these yields, but such yields only occur when there are problems, such as economic problems or default issues,” Reed said in an interview surrounding its fourth quarter outlook (report released on Wednesday). He pointed out that the current situation is not the case and the economy is still strong, “so you really don't have to worry about any significant default.”

Reed did not specify which bonds were included in the above combination. As a reference, the iShares Aaa - A rated corporate bond ETF (QLTA) has a 30-day SEC yield of 5.68% and a valid period of 6.48 years — longer than the low-term direction emphasized by Reed. The iShares Flexible Income Active ETF (BNC), managed by Reed, has a 30-day SEC yield of 5.66% and a 3-year term, but its portfolio is not limited to investment-grade credit bonds.

Best opportunities include hyperscale vendors

Reed believes that the best opportunity now is to invest in grade corporate bonds — which he “hasn't talked about in a long time,” he emphasized. Investment-grade bonds are AAA to BBB- in the S&P and Fitch ratings systems, and Aaa to Baa3 in the Moody's system.

This includes large-scale vendor bonds. As these companies bolster their AI infrastructure, their bond issuances are flooding the market this year. According to London Stock Exchange Group (LSEG) data, as of October 20, Google (GOOGL.US), Amazon (AMZN.US), Meta Platforms (META.US), and Oracle (ORCL.US) issued a total of about US$228.4 billion in bonds during the year.

“They have a very low leverage ratio, and huge cash flows in,” Reed said of hyperscale manufacturers as a whole. “You can now buy these higher quality entities, and you can also get very attractive returns.”

The iShares Flexible Income Active ETF managed by Reed has raised the allocation ratio of investment-grade corporate bonds to 14.3% of the portfolio, compared to 8.5% in July.

However, he cautioned that investors need to be patient and able to handle it, as interest rates may continue to rise from then on. “Your starting yield is the best yardstick for judging future returns,” he said, “so if you get 7.25%, it may become 8%, or 6%, but... as long as you hold for a year or more, you'll get that yield.”

He also warned that in addition to investment-grade credit bonds, more caution is needed, which requires greater selectivity and more in-depth research. AI-related targets are also among them.

“There are parts of the data center supply that are not guaranteed or endorsed by hyperscale vendors,” he said. “We have always been more careful about this part and will continue to be so.”

The bond market, especially high-yield credit bonds, has been impacted as investors' concerns about some companies burdened with huge debts for AI construction have intensified. Junk-grade CoreWeave is typical, with falling stock prices, jumping bond yields, and widening credit default swap spreads. Oracle, which is at the lower end of the investment-grade range and is seen as a trendsetter for the overall AI market, has also been hit a bit.

Watch the Federal Reserve

Reed is also watching the Federal Reserve. To combat inflation, the Federal Reserve is expected to raise the federal funds rate again in December. According to the Chicago Mercantile Exchange Group's FedWatch tool, the market's current pricing probability is close to 90%.

The asset management executive expected interest rate hikes to occur, although he did not agree with this approach. He pointed out that higher interest rates are hurting some parts of the economy, such as real estate, and have little impact on other sectors — such as capital expenses for technology companies, which have become an important driver of growth.

“They don't borrow money at overnight federal funds rates,” Reed said. “Housing, credit cards, car loans are heavily funded at variable interest rates, and you've already seen these areas under pressure.”

He added that the market is and will continue to price AI that is about to enter the market.

Forward-looking risk calculation

Reed believes there are a number of risks ahead, including rising levels of government debt around the world. In the US, the 2026 budget deficit widened to $2 trillion.

“The more interest rates are raised by the central bank, the cost of debt for these already heavily indebted governments is something we must be careful about in the long term,” he said.

The supply of bonds from AI companies is also worth watching. “Considering the upcoming scale of supply — data centers, hyperscale vendors — there is some kind of crowding out effect,” he said. “As interest rates on government bonds rise, this is something we must keep an eye on.”

Meanwhile, Reed said he would continue to reap the rewards of high investment-grade returns, “and laugh a lot.”