A top BlackRock insider says that the stock market could face a correction in the near future if inflation takes off.
In a new interview on Bloomberg, Rick Rieder, BlackRock’s chief investment officer of global fixed income, says that the US government’s fiscal situation requires it to issue “a lot” more debt.
Rieder says large debt issuance makes it harder to allow longer-term yields to go up, making it more difficult to invest in T-Bills with durations longer than 10 years.
And if inflation picks up, Rieder says long bonds could get hit even harder along with equities.
“We’re going to issue a lot of debt. The long end is a hard place to invest. It used to be that the long end protected you against the equity market. If inflation ends up being higher, which I don’t necessarily anticipate, then what’ll happen is equities and the long end will get hit.
So the long end of the yield curve today, given that you can get so much yield – if you’re an investor on the front end – the long end doesn’t become that attractive.”
Looking forward, Rieder says that the US can only maintain its debt burden if it somehow manages to spur a higher GDP than the amount of debt it takes on, perhaps with the productivity expected to come from the growth of artificial intelligence (AI).
“There’s only one way to de-lever the economy. You’ve got to outrun the debt, you’ve got to outgrow it. So there is a plausible outcome where you get nominal GDP running at 4.5-5% if you get that interest rate down to 3%. Gosh, now you can start to de-lever but it takes a really long period of time.
Listen, I think the one engine today, since we are going to have a bigger debt burden, and not only are we going to have a bigger debt burden, you have to fund it domestically, because internationalism doesn’t buy as much. As long as we grow, then you can work through it.”
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