What BlackRock’s results show about the high-yield effect

High interest rates and yields are changing the markets, and you can see it in BlackRock’s gigantic balance sheet.

In the third quarter, the firm counted $2.57 billion in net inflows to its portfolio of assets under management. That’s just a fraction of the nearly $17 billion worth of net inflows a year earlier, and even higher intake figures—above $100 billion—in some other recent quarters.

Where’s all that money going, if not to BlackRock’s books? Investors may be putting it into cash funds instead.

“Rate hikes over the last 18 months mean that for the first time in nearly 20 years, clients can earn a real return in cash,” BlackRock CFO Martin Small said in an earnings call last Friday. “Investors have been able to generate positive returns while waiting for inflation to cool and for more policy certainty from central bankers. This weighting has weighed on industry flows, including here at BlackRock, consistent with prior periods of policy uncertainty like 2013, 2016, and 2018.”

Execs at the mammoth money firm said it still has momentum—a lot of the damage to inflows was done by a single client’s $19 billion redemption, Small noted.

Still, CEO Laurence Fink acknowledged that some investors are being drawn to “conservative cash and bond portfolios” that can now earn returns of 5% to 7%. It’s a sign of how rising yields on Treasury bonds can draw money away from equities and the stock market, which has economic implications.

“In short, investors are being paid to wait, something we haven’t seen to this degree in years,” Fink said.

So what comes next? BlackRock President Robert Kapito thinks that some of the biggest effects of high yields and interest rates are still to come. We may see “some very, very large allocations” to fixed-income assets as the US approaches the expected peak of interest rates.

“And I’m sure someone will call it the Great Reallocation,” he quipped. And BlackRock, he argued, is “well-positioned to benefit from this reallocation."

By the way, lest you worry, BlackRock is doing just fine—the firm still has more than $9 trillion under management, beat profit expectations, and plans to use its fearsome debt capacity to take on a new wave of mergers and acquisitions.