Increasing rates. Is it 2007 all over again? | UBS Trending

Trillions of dollars are sitting in cash, Treasury yields are at record levels, AI is fueling a borrowing boom, and investors are asking one question, where are the opportunities now? BlackRock's Rick Rieder joins us with his latest outlook on the markets and more, right now on UBS Trending. Hi everyone, and welcome to UBS Trending. I'm Anthony Pastore. Thanks for joining me today. Very excited to welcome back to the studio Rick Rieder from BlackRock. By the way, he is also a member of our research advisory board here at UBS, and that is a group of experienced market leaders and industry experts who collaborate with UBS's chief investment office to explore the key themes driving markets, the economy, and long-term investing, and that board's perspectives help broaden the conversation around today's most important investment topics, and bring very valuable insights to UBS clients and advisors, and Rick is one of those members. Rick, good to have you back. Great to see you, my friend. — been a while. It has been. Glad to be here. — And by the way, you're here on a really interesting and auspicious day for the bond markets. As we're sitting here, the 30-year Treasury yield is at 19-year highs. 2007 was the last time we saw these levels of 5 3 2, 5 3 1. Just before we get started because this will probably lead us into the rest of our chat, what do you attribute this extreme rise in yields in the long end of the curve? — So, by the way, I thought it'd be better if I could get the people the equity people get to come in and say it's all-time highs and record highs. I get to like the cheapest time in the bond market. So, listen, I mean, there are a couple of things that have been happening. And I you know, listen, I think there were a bunch of people who put stories to what's happening that I don't think are 100% true. One, I actually think if you think about when the Fed met last, employment has actually been sluggish, inflation has actually moderated. So, I don't really think this is, gosh, the going to be hiking dynamic at play. Um I do think there's something that is significant though and that is the um the fact the amount of financing that's coming to the market is pretty impressive. So, you've got treasury issuance, you've got a fiscal dynamic that's quite real and then you've got this immense amount of AI data center supply that's coming to the market all at once. And by the way, when rates move higher, you get mortgage rate extension and so all those things have led to just more supply into the market. So, I think it's a supply demand dynamic. We also historically you had much greater contribution from other parts of the world that were buying our treasuries, China, Japan, uh Brazil, other parts of the world and quite frankly, they're funding their own domestic and or buying gold. And so, you have you don't have the buyer bases and it's extensive. People have pulled back saying, "Gosh, I'm going to wait a little bit. Treasuries don't do for me what they used to do for me in terms of gosh, they're a great hedge against equities, particularly if inflation's higher, it means equities get hurt the same time that bonds do. " So, listen, I think it's primarily a supply, but I listen, I think people have also gotten a sense of like gosh, long end interest rates, what do how do they fit my portfolio today? And you don't have the buyer base you had before. — Yeah. It's interesting because you know, we're obviously talking a lot about artificial intelligence. I want to get into that with you in a little bit on the debt issue inside because corporate debt is really getting fueled a lot by what's going on in the AI side. But I wanted to keep with the rates you know, cuz we just as you mentioned, Warsh had a meeting a couple of weeks ago. He talked about periods of watchful thinking when they talk about, "Why are you going to raise rates? " Now, the market thinks he's they're going to raise rates before the end of the year. CIO here at UBS doesn't think that's going to happen. They expect probably two cuts next year. What are your thoughts on that when you tie it into jobs, inflation, all the things that contribute to what the Fed has to think about every time they go into a meeting. — I [clears throat] mean, I by the way, not a lot of people believe exactly like you described. I think the same. — Yeah. — I think it's crazy. I mean, I think hiking rates when you're looking at By the way, if you take I think we brought a chart to show where inflation is going. If you take the 3-month moving average of course CPI, we're running at 1. 6%. — Yep. — The 6-month moving average is 2. 4. Core goods inflation, where it's I would argue the interest rate is the most influential on Core goods inflation is running literally at zero. You have service level inflation, but even service level inflation is not running that high. So, I mean, you look at this chart and say, "Gosh, the Fed's going to hike into this? " It doesn't make a lot of sense to me. And plus, you know, in the employment world, we've hired a lot the 3 months we've hired 20,000 jobs. Uh if you strip out health care, it's a negative. — Right. — you go back 6 months, the same dynamic. Meaning, I don't think the Fed should be hiking. And I agree, I think the next move's going to be a cut. Like you say, markets are anticipating a hike. You have a hawkish committee. I will say one thing about I think, you know, I get asked all the time, Fed credibility. Listen, I think they need to give the new chairman a chance. I think he's got these task forces. I think he's going to lay out What are those task forces? I mean, these are complex issues. Is policy restrictive? I don't know. Housing's having a tough time. AI's going to keep spending. Um the And by the way, what is the most effective

tool? Is the interest rate, or is it liquidity? Is it a balance sheet? Is it regulation? So, I think he's going to work through a bunch of these issues. The one thing that I think will be critical going forward, I think Jackson Hole could be an important moment. — coming up really soon. — Yeah, and I think that will be the end of this month. What are the metrics you're looking at? What are the tools you're using to analyze inflation, to analyze these complex subjects? And I think if he can give a little bit more clarity on the metrics, which by the way, doesn't mean forward guidance. People are freaked out we're going to get less forward guidance. I actually think that's a great thing. I think the markets have become too married to quite frankly the dot plot, where forward guidance has been wrong. Think about transitory, you think about You know, you think about economic projections the Fed haven't been right. I don't think we need as much forward guidance. Markets just need give me the metrics. — Mhm. — Give me the tools that you're going to utilize to assess the what you're thinking about in terms of inflation, employment. And I think Jackson Hole could be a time of that. And if you got more clarity around it, you could see rates start to stabilize and rate volatility come down, which is also important. — the markets will start pricing in a cut in 2027. I mean, there's only so much they can anticipate that they're going to hike before the end of the year. And given that also, I mean, look at I mean, there's something like 8 trillion dollars of cash in money markets. — Right? On the sidelines globally. So, people are missing out on this opportunity to look at I mean, if you want duration, you've got it. 5. 3% on a 30-year Treasury or 20 years or just like I think like one basis point below that. Even the German Bund is at high level since we haven't seen since 2011. So, would you where would you be putting some of that money to work? — So, I think today I still think we'd be a bit careful about long end interest rates. I don't think, you know, we've kept our interest rate exposure to a pretty nominal level. Income really works. So, I don't think I think when you go back and you say, you know, I think 2 years from now, 3 years from now, people are going to say, "Wow, I got to buy assets. " Like we run up an ETF called Bank. We're running close to 7% yield in the portfolio with less than 3 years of interest rate exposure and A- minus rating. I've spent most of my career longing to do something like that. Creating income, you don't have to take as much interest rate exposure. I think to me, that's what you got to do. And by the way, Europe is super dear point about Bunds. Europe is super attractive. Think about we had years of negative interest rates. Now as a dollar investor, you get the cross currency benefit. You know, we buy I hold the largest percentage of European fixed income that I've ever owned. And by the way, emerging markets are if you don't think the dollar is going to appreciate significantly, which I think is a fair assessment, EM makes some sense. So, you know, my view today, diversify diversify fixed income. Equities are different. Focus, concentrate AI, these stocks are going to continue to do well. In fixed income, I'm trying to be as boring as humanly possible — and diversifying just keep the thing stable with a lot of yield so people can sleep at night. — mostly the time in our in most of my career, maybe yours, fixed income was kind of a boring asset class. It was staple and stable and it's actually really exciting these days given everything that's going on. But and that turn takes us to the AI side of the story. It almost feels like the bond market, especially on the corporate bond side, is having a little bit of a renaissance because there's so much potential debt that's being issued from a lot of these AI companies on the corporate bond side. It's giving investors a real opportunity to kind of get in here. Do you think that that's where we should be thinking about as far as like long-term planning? — So, I've historically always been a believer in technology. You should own it in equity. — Yeah. — Like bonds, we should be a little more safe and you know, utilities, telecom, bonds, etc., industrials. Today, I think you have to reassess your model a little bit and say, "Gosh, maybe I will finance some of these companies. " You know, some of the data center financing that's coming that's two, three, four-year debt that's getting us some really nice yields. Would I pick away at some of that? For sure. Some of that, you know, some of the hyperscaler issuance out the curve, the yields are pretty high today. That being said, I don't think there's any race because they're going to keep coming to the market. So, I think today, I still think AI equities, technology equities, I think your upside is tremendous. Would I start picking away at some of particularly some of the shorter-dated AI data center debt? I think so. And then, listen, I mean, I think it's to own part of your portfolio in some of the hyperscalers, maybe a bit of it. I just don't find like we got to race into long-duration technology debt. I just don't think there there's an emergency that we get in there. There's plenty of ways to get yield in the portfolio and I'd be a little bit more careful today on that side. — a risk that that, you know, spreads need to kind of adjust a little more widely at this point? — Listen, I think there's a lot of I mean I've I quite frankly I've seen the industrial I've seen I don't know how many different cycles. Yeah. And you see industrial development, you see like the telecom issue and so it's sizable. This is really big. This is really big and I think part of you know whether you talk to people in administration or otherwise like why these rates doing this. Like we got to reprice real rates to the

point where we're going to finance a lot of it and there's something that's it's not just a the amount. I think there's something that's really different. They're the IRRs, the returns on their investments. — Yeah. — That 25-50 basis points doesn't really make a hill of beans of their weighted average cost of capital. So as long as their IRRs are so high, they can issue at cheaper levels and so on the you know from the bond side or on the investor side you say okay, maybe I'll be a little bit careful about it cuz it's not only going to come but it's going to come at levels that they just need size and they're willing to price into that size. — everybody wins in that scenario. — Correct. Yeah. Correct. You just as an investor, you just got to wait for the deals that make a lot of sense that are already priced in like wow, that's a lot of yield. I've already factored in the supply that's going to keep coming. — What do you think about the intermediate part of the curve right now that you know twos, fives, especially the five-year. We like it here. I mean the CIO really likes that five-year. It's about 439 right now which is an unbelievably good yield for a five-year. What are your thoughts on that given you know I mean five years intermediate that belly is It's not much of a belly now but — Yeah, I hate to be that agreeable but Listen, that's my favorite part of the curve. By the way, the very front it carries well in a portfolio. The very front I you know it's pretty hard to fight now where you're pricing the Fed given you got a hawkish committee. But the belly if you think about where forwards are going to go and you can actually get some real price return if they do flip which I think they will to an easing posture you can actually make some money in the belly of the curve. I like I don't know I like the belly. I like owning the belly of the curve and then owning some yielding assets spread to that. Sure. And I that to me by the way, you run your break evens of owning that, you need rates literally if you're owning spread assets, if you assume default cycle is reasonably low, which I think is right away from loans, some parts of loan market. Boy, your break even, you need rates to go up 75, 80, 85 basis points to be down on those trades. I don't think we're going there. So, the break even relative to cash of being in that belly is pretty attractive today. — Yeah. And in a well-diversified portfolio of equity, some alts, got some like little bit of commodities in there, and the fixed income. — Yeah. — Great way to think about especially right now in this market. I can't let you go because one of the one time I did have you in the studio and I forgot to ask you a question about what your latest and greatest technological sort of a ficionado brain is thinking of. I'm going to ask you, what's the latest and greatest tech that you're geeking out on these days? — I mean every I mean so first of all, like things like robotics, I need to have my own robot. I'm working on it. Yes, I do although I got to figure out the one that's not, you know, fully you know, they're they're listening to everything in my life, but anyway, I got to figure that one out. — Right. — I By the way, I'll say the two things that are really cool. First of all, full self-driving, and this is part of why I'm a little wigged out about employment in this country, etc. The full self-driving cars are crazy now. Like you literally don't even have to pay attention. Like they are literally I mean I'm not advising that. But anyway, they're pretty incredible in terms of uh that blows me away now. And then the one that I think that [clears throat] I'm getting into now, I don't think the technology is there yet, but I think we're not more than a few months away, is I think the glasses. And I know Meta's talked about it, Google's talked about it, Apple has gone down the road, and I think maybe it's stopped and started around but boy, I think I think, you know, when you think about what mobile telephony is and the adjacency around glasses and things that can happen around glasses, some of it's virtual reality that is that's pretty extraordinary. Right? Somebody told me the story, you could at some point we're going to be sitting at dinner, and you'll have people sitting at the table that actually won't be there because you'll see them on your glasses which I've said I don't think the restaurant's going to love that — but only one person's eating. But anyway, I think glasses is going to be you know, optics generally, optical generally. I think it's going to be a pretty powerful dynamic. — It's funny you my producer Kyle was in my ear saying, you know, it's almost like every time you watch a Black Mirror episode, you can almost anticipate that we'll see that device in our own lives in the next 10 or 20 years, maybe less. — Totally. It's exponentially — Yeah. — upgrading. — That's what makes it so cool today. And you can invest around some of these. — Exactly. We love the AI investing here, our transformational opportunities. — Great stuff. Rick, always a pleasure. I feel like I can talk to you for forever. So thanks for coming by. — My pleasure. I appreciate it. — Great to see you. Rick Reeder from BlackRock. Thank you all for joining us. There's a lot more information coming out of Rick and BlackRock and the rest of our great partners at ubs. com/views including content from our own chief investment office here at UBS. Plus you can follow UBS Trending on social media. We're on Instagram at our dedicated channel at UBS Trending. You can find it right there on your screen. You can also check us out as far as UBS goes on LinkedIn and Facebook. So lots of content there for you. And as always, if you have any questions about what Rick and I spoke about today, please make sure you continue this conversation with your financial advisor. Until next time, I'm Anthony Pastore. We wish you a great rest of your day everybody and remember to keep your eyes on what's trending. We'll see you soon. —