BlackRock’s bond chief Rick Rieder oversees $3 trillion. Here are 2 of his favorite investments right now for high yields.

BlackRock’s Rick Rieder and CNBC’s Delivering Alpha Conference on September 28, 2023. 

It’s getting harder for investors to find the kind of robust yields on cash equivalents they could collect earlier this year.

With the Federal Reserve expected to have slashed interest rates by a full percentage point by the end of the year, returns on vehicles like money market funds, certificates of deposit, and short-end Treasurys are dipping.

But there are corners of the fixed-income market where investors can find yields that offer an attractive premium over benchmark rates, according to BlackRock’s CIO of Global Fixed Income Rick Rieder.

Rieder, who oversees $3 trillion, shared with B-17 this week a couple of his favorite areas of the fixed-income market at the moment to find higher returns. One is AAA collateralized loan obligations, or CLOs, which are a group of bonds packaged together in the same instrument. The AAA part of their name signifies that they’re high quality, or investment grade, and have the lowest default risk possible.

AAA CLOs “trade at a 120 basis-point spread to the SOFR curve,” Rieder said, referencing projected secured overnight financing rates (SOFR), which track closely with the fed funds rate. “That gets you a lot of yield as a AAA asset. That is one of my favorite sectors today.”

Second, he likes European credit, both investment-grade and high-yield. High-yield bonds are viewed as riskier assets but offer better returns.

Because the euro is stronger than the dollar, the effective yield that European bonds offer is higher when they’re converted back to US dollars. They’re also appealing because European firms’ creditworthiness has strengthened, thanks to lower debt levels after the pandemic, he said.

“As a US investor, you get an extra 150-ish basis points from buying those assets,” he said. “And if there’s one unique thing around credit today, it’s that post-COVID and around COVID, these companies termed their debt out, so they have no debt coming. So I like being a lender in Europe, and I like owning equity in the US.”

Rieder is betting on both European credit and CLOs through the exchange-traded fund he manages, the iShares Flexible Income Active ETF (BINC). Combined, they make up 39% of the fund’s holdings.

BINC has performed impressively since launching in May 2023, bringing in $6.7 billion in assets under management and delivering an annualized yield of 5.9%. $2.2 billion of those inflows took place during the third quarter this year, the most of any active ETF in that time, according to BlackRock.

Rieder said the fund achieves this return in part by bundling high-yield (and therefore higher-risk) bonds with investment-grade bonds. The average rating of the fund’s holdings is BBB+, putting it at the bottom of the investment-grade range. That’s just under the 6% yield offered by the ICE BofA US Corporate BB Index, a high-yield bond index.

But he also said the flatness of the yield curve — or the uniformity of yields across various durations — allows his fund, with an average duration of 2.5 years, to take advantage of strong returns without having to buy longer-term assets. Most of the time, investors are compensated with higher yields for locking up their money in longer-duration bonds, making this “an extraordinary point in history,” Rieder said.

“You don’t have to take risk longer out the yield curve, and you can own things like AAA CLOS, AAA mortgages that are super high-quality and blended with other assets,” he said. “It’s been a couple of decades since you could do that.”

Rieder said the interest rate environment would likely be “static” in the near future if inflation remains sticky and growth stays strong, as these conditions would prevent the Fed from cutting very much on the short end of the yield curve and investors would continue demanding elevated yields for longer durations.