BlackRock Fixed Income CIO: High-grade credit presents a "historic" opportunity, with hyperscaler debt the top choice

Title context: BlackRock Fixed Income CIO: High-grade credit presents a "historic" opportunity, with hyperscaler debt the top choice Text: Although volatility in parts of the bond market is putting investors on edge, Rick Rieder, BlackRock, Inc.'s global chief investment officer of fixed income, says investors face a "historic" opportunity to lock in substantial yields in high-quality credit. Rieder said that on a hypothetical basis, it is now possible to build a diversified portfolio with a yield above 7%, duration of less than 3 years and average credit quality of A-. Duration measures how sensitive a bond's price is to interest-rate fluctuations, and shorter-maturity bonds tend to have lower duration. "This is historic not only in terms of the levels these yields are at, but also because these kinds of yields only show up when there are problems, such as economic problems or default problems," Rieder said in an interview about his fourth-quarter outlook, which was published Wednesday. He noted that is not the case now, with the economy still strong, "so you really don't have to worry about any significant defaults." Rieder did not specify which bonds the portfolio would include. For reference, the iShares Aaa-A Rated Corporate Bond ETF (QLTA) has a 30-day SEC yield of 5.68% and an effective duration of 6.48 yearshigher than the low-duration approach Rieder emphasized. The iShares Flexible Income Active ETF (BINC), managed by Rieder, has a 30-day SEC yield of 5.66% and an effective duration of 3 years, but its portfolio is not limited to investment-grade credit. Top opportunities include hyperscalers Rieder sees the best opportunities right now in investment-grade corporate bondsa point he stressed he "hasn't said in a very, very long time." Investment-grade bonds range from AAA to BBB- on S&P and Fitch's rating scales, and from Aaa to Baa3 on Moody's Corporation's scale. That includes hyperscaler debt. As these companies ramp up AI infrastructure, their bond issuance has flooded the market this year. According to London Stock Exchange Group (LSEG) data, as of Oct. 20, Alphabet Inc. Class C (GOOGL.US), Amazon.com, Inc. (AMZN.US), Meta Platforms (META.US) and Oracle Corporation (ORCL.US) had issued a combined roughly $228.4 billion of bonds year to date. "Their leverage is very low, and they have enormous cash flow coming in," Rieder said of hyperscalers broadly. "You can now buy these higher-quality issuers and still get very attractive yields." The iShares Flexible Income Active ETF managed by Rieder has raised its allocation to investment-grade corporate bonds to 14.3% of the portfolio, up from 8.5% in July. He cautioned, however, that investors need patience and staying power, because rates could still rise further from here. "Your starting yield is the best gauge of future returns," he said. "So if you get 7.25%, it might become 8%, or it might become 6%, but... as long as your holding period is a year or more, you'll get that yield." He also warned that greater caution is needed outside investment-grade credit, which requires greater selectivity and deeper research, including among AI-related names. "There are parts of the data-center supply chain that are not guaranteed or backed by hyperscalers," he said. "We've been more cautious on that part, and we will continue to be." As investor concerns grow about the huge debt some companies are taking on to build AI, the bond marketespecially high-yield credithas been hit. Junk-rated CoreWeave has become a prime example, with its shares falling, bond yields jumping and credit-default swap spreads widening. Oracle Corporation, which sits at the low end of the investment-grade range and is seen as a bellwether for the broader AI market, has also taken a hit. Watching the Fed Rieder is also watching the Federal Reserve. To fight inflation, the Fed is expected to raise the federal funds rate again in December. According to CME Group's FedWatch tool, the market is currently pricing in a probability of nearly 90%. The asset-management executive expects the hike to happen, even though he doesn't agree with it. He noted that higher rates are hurting some parts of the economy, such as real estate, while having little effect on otherssuch as technology companies' capital spending, which has become an important driver of growth. "They don't borrow at the overnight federal funds rate," Rieder said. "Housing, credit cards, auto loansthere's a lot of floating-rate financing in these areas, and you've already seen stress there." He added that the market is pricing, and will continue to price, the AI supply coming to market. Calculating risks ahead Rieder sees several risks ahead, including rising government debt levels globally. In the U.S., the fiscal 2026 budget deficit has widened to $2 trillion. "The more central banks raise rates, the cost of debt for these already heavily indebted governments is something we have to be careful about over the long term," he said. Bond supply from AI companies is also worth watching. "Given the scale of supply comingdata centers, hyperscalersthere is some kind of crowding-out effect emerging," he said. "As government bond yields rise, this is something we have to keep watching." At the same time, Rieder said he will keep harvesting the returns from high investment-grade yields "and smile more."