If Rick Rieder, the bond investor of BlackRock Inc. is of the opinion that tax cuts will assist the American economy to win its battle against higher interest rates. He said that monetary policy is taken lightly now after hearing that the rates were raised for the first time by the Federal Reserve within a year. He admitted that he has significantly lowered his exposure towards government debt in the short term. Rieder now favors US corporate debt which pays greater yields. Shorter dated Treasuries gave their maximum yields within five years on December 14. The dollar value went up and stocks suffered a dip post the Federal Reserve raising their rates.
Market opportunities and the state of the market
Rieder is searching for a number of buying opportunities in US corporate debt of lower grades. He believes that these kinds are a much safer bet compared to high yielding assets like the emerging market fixed income. Opportunity of making such purchases is being offered by the markets.
Reider said that the economy is more hawkish compared to the expectation of the markets. In 2017, he said, Ten-year yields from the Treasury may move from the 2.58 percent range to low three percent range within 2017. He has trimmed his exposure to the longer term government debt already. He further added that the US economy will drag if the rates are further increased by 0.50 percentage points. However, he said, the economic hit can be easily offset by the tax cuts. According to Rieder, if the rates go north by about 100 basis points, but personal income taxes in the United States were slashed by five percent, this cut in tax will have a much larger economic impact. This will lead to the softening of any blow which might occur.
Better than before
According to Rieder, if such a thing happens, it would imply that the central banks have receded much in importance when compared with the spending policies instituted by the government. Commodities and risk assets are concentrated towards the path of forward growth. He laid a positive roadmap after the raise and compared it favorably against the rate increase which happened the last time in December 2015. The Standard & Poor 500 stocks, post that move, were sold off by almost 12 percent. The commodities and bonds also fell until the markets were bottomed out in February 2016.