Review · Policy News
Key Takeaways Even though inflation is improving, sticky inflation in shelter, healthcare, and other sectors complicates the Federal Reserve’s job, says BlackRock’s Rick Rieder. Value is emerging in Japanese government bonds, European credit, and emerging markets. In addition, yields and credit quality for US investment-grade credit are attractive.
The big rise in long-term bond yields has been a key trend in 2026, and there’s a lot riding on the outlook for inflation when it comes to where the market goes from here. Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the global allocation investment team, is among those who feel that better news lies ahead for inflation, but it may not make the Federal Reserve’s job easier. We spoke with Rieder, who also manages the $50 billion BlackRock Strategic Income Opportunities Fund BSIIX , about what a productivity boom means for the inflation outlook, where the Fed could face headwinds in its inflation fight, and where higher yields are creating opportunities that haven’t been seen for many years.
Those opportunities, he says, can be found across the US, Europe, and Japan. Leslie Norton : The Fed cited stubbornly high inflation as it raised interest rates this month. What are your inflation assumptions?
Rick Rieder : We think core inflation is peaking and coming down. We think core PCE [in July, the core Personal Consumption Expenditures Price Index was up 3.3% from a year earlier] inflation will come down to the mid-twos within the next few months. The problem with headline PCE is that the war is keeping energy prices elevated.
We have some optimism that inflation will come down over the next few months. We’re going through a productivity revolution. Productivity is exploding higher in terms of how companies use logistics, inventory management, and customer procurement.
I’m quite convinced inflation is peaking and will be coming lower over the next couple of years. Timing is tricky, but it will allow the Fed to stop hiking and ultimately start cutting rates in the next year or so. Norton : What’s keeping inflation high?
Rieder : The major sectors of the economy that have kept inflation high have been healthcare, education, insurance, and shelter. They’re not interest rate-sensitive, and generally not as economically cyclical, but inflation here has been sticky. Ironically, shelter inflation is high because we can’t build any houses.
We can’t build any houses because the mortgage rate is too high. Given the cost of the mortgage, home prices would have to come down 35% to make it equivalent to where rent is today. That’s part of why I think raising rates won’t help.
Healthcare in an aging demographic, insurance, tuition costs—they’re all very, very hard. That doesn’t mean the Fed should give up. But if you thought about how much you’d have to move interest rates higher to actually bring these prices meaningfully lower, you’d have to really send the economy into a recession.
That puts pressure on most of the country—small businesses, low-income, everybody who wants to buy a house, young people. Truth is, the only people who borrow off the overnight funds rate are floating-rate borrowers—that is, credit card, auto loan, mortgage—and those are already in recession. What to Expect From the Fed Norton : What else should we expect from the Fed?
Rieder : Given the dot plot, the chairman’s comments, and the fact that it will take a bit more time to get core PCE closer to the 2.0% target, you have to bank on another hike this year. Could you get one more next year? It’s possible.
My sense is the economy will decelerate, and inflation will come down, particularly if we get to the other side of the war. Is Treasury’s Buyback Plan Working? Norton : The US Treasury surprised the market last month by announcing it would step up purchases of long-term bonds to curb rising yields.
Is the Treasury Department’s buyback plan working? Rieder : It’s hard to prove one way or another. It puts in the back of people’s minds that the US Treasury has tools to combat significantly higher rates.
There hasn’t been a disruptive, untethered movement in the back end of the curve. Secretary [Scott] Bessent hasn’t spent any real money [so far]. Norton : What grade would you give Secretary Bessent?
Rieder : He gets a passing grade, which is a better grade than many would give him. The US has $40 trillion in debt. We have a compounding interest problem.
When you raise rates, you increase the compounding effect. He could certainly buy back more. We have gold on the balance sheet.
The tricky thing is that 89% of US debt is two years and shorter. Buying back debt on the long end by definition shortens the weighted average maturity of your debt, while you ultimately want to try and extend the average maturity to create a more stable term structure of the country’s debt. Are we just lifting our interest costs significantly as a country?
The secretary is trying to mitigate some of that damage. Norton: How much further could US long-term yields rise? Rieder: You could see another 25-40 basis points more.
But because of the aging of the population, it becomes extremely compelling for an endowment or pension or foundation to put money to work at these real rates. It’s generational that you get to do this. I run an exchange-traded fund called iShares Flexible Income Active ETF BINC .
It has a 7.2% yield, a duration under three years, and an A- rating. I waited four decades for that. It’s pretty darn compelling.
Norton: Let’s talk a bit more about what’s underlying the rise in long-term yields. Japanese government yields have moved higher. How does that market look to you?
Rieder: I like long-end Japanese government bonds for the first time in a really long time. The Bank of Japan has a real disposition toward hiking rates now. The impact of the move in JGBs on US rates is much smaller than it used to be.
Today, long JGBs in a US domestic portfolio make sense. I haven’t found many back-end developed-market interest rates worthwhile for a while. We’ve added a bit of US and added some Japan.
Norton: What else do you like? Rieder: We like European credit. We had nine years of negative interest rates in Europe.
Obviously, the European Central Bank has a single mandate of staving off price pressure. Yields in Europe, particularly credit and securitized assets, are very attractive. In addition, I like emerging markets.
Inflation is coming down in a number of countries. And until recently, I didn’t like investment-grade credit in the US because spreads weren’t attractive. But given this last rate move, if you’re an insurance company or pension fund, these yields on investment-grade credit become very interesting.
We’ve been adding investment-grade credit very recently as it also fits our portfolios given this yield and solid levels of credit quality. Risks in AI Financing Norton: How much has the surge in corporate bond sales financing the artificial intelligence buildout affected long-term yields? Rieder: A lot.
No question the war has a lot to do with where the rate is in the near term. But the amount of issuance that’s come in has been significant. I think you could put 20-25 basis points of the rate to the war and oil prices.
The balance is from a combination of other factors, of which I think supply is a big part. Norton: For bond investors, where do the risks lie in the AI financing boom? Rieder: Whenever you finance new technology, you have to be careful.
Some of the hyperscaler-related finance is attractive because you know they’ve got cash flow for an extended period. The risk is that some of these entities don’t have the durable cash flow, or the ROI is not as high as people think. You’re counting on good execution on building the data center or on getting enough power or on getting the GPU in.
When we look at any structure, we think about execution risk and technology change. How much term are we financing for? Who’s the ultimate obligor?
And then what’s the execution risk? Norton: Thanks, Rick. The author or authors do not own shares in any securities mentioned in this article.
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Source: Morningstar
