BlackRock’s Rick Rieder believes the current bond market presents a compelling ‘sweet spot’ for investors, particularly focusing on higher-quality high-yield bonds with maturities between three and five years. This strategy emerges following the recent volatility triggered by Moody’s downgrade of the U.S. credit rating and subsequent investor flight to safer assets. The market reaction, driven by President Trump’s tariff announcements in early April, caused significant spikes in 10-year and 30-year Treasury yields. The 30-year Treasury climbed to approximately 5.03%, while the 10-year briefly reached 4.5%. Rieder, BlackRock’s chief investment officer for global fixed income, has strategically reduced high-yield exposure within the iShares Flexible Income Active ETF (BINC) in response to this initial market turbulence. Despite the initial concerns, Rieder maintains a positive outlook, anticipating a short-lived economic pullback and a fundamentally strong U.S. economy. Consequently, he’s actively rebalancing his portfolio by increasing allocations to higher-yielding assets.

Rieder specifically highlighted BB-rated bonds – the highest-rated non-investment grade tranche – as particularly attractive due to crossover buying activity from investment-grade investors. He avoids CCC-rated bonds, recognizing the increased risk of potential defaults during an economic slowdown. The B-rated segment is considered the ‘sweet spot’ due to its balance of yield and reduced risk. The iShares Flexible Income Active ETF (BINC) currently holds nearly 40% of its portfolio in U.S. high-yield corporate bonds and loans, with the majority concentrated in U.S. high-yield corporate bonds. This ETF, which debuted two years ago and now manages over $9 billion, boasts a 30-day Securities and Exchange Commission yield of 5.57% and a net expense ratio of 0.4%.

Rieder’s strategy incorporates a ‘barbell’ approach, utilizing agency mortgage-backed securities alongside high-yield bonds. These mortgage-backed securities, backed by government obligations, offer minimal credit risk and benefit from fluctuating interest rates, potentially leading to cheaper mortgage rates when volatility increases. Specifically, he’s adding mortgage paper to capitalize on this dynamic. Furthermore, Rieder is diversifying his portfolio by including European sovereign bonds, particularly from Germany, as well as peripheral European sovereigns like France, Ireland, Spain, and Italy. His focus is on the five- to 10-year portion of the yield curve, recognizing that as a dollar investor, currency swaps make European rates surprisingly attractive. After years of negative interest rates, investors are now able to acquire yields with a steep yield curve.

This strategic approach reflects Rieder’s belief that the current environment offers a unique opportunity to generate attractive returns while carefully managing risk, particularly in light of anticipated rate volatility and evolving global economic conditions. The ongoing shift in investor sentiment and the potential for continued economic strength are key drivers behind his investment decisions, positioning BINC for continued growth and performance within the high-yield bond market.