Portfolio perspectives from leading investors
How do you think the role of fixed income in portfolios is changing?
BlackRock's recent client survey indicated that objectives for fixed income are shifting from portfolio ballast to return enhancement. And in our view that makes sense. At today's elevated risk-free rates, our base case remains that fixed income may be able to generate an attractive return, while also providing scope for further total return in an asymmetric downside shock.
Additionally, real rates have moved up to near 15-year highs, suggesting the fixed income markets are offering attractive compensation even after considering the likely path for inflation ahead.
What are your views on duration in this current environment?
Interest rates have seen a sharp rise in recent months, especially further out the yield curve. This is attributed to a few factors.
First, despite moderating inflation, growth has shown resilience, particularly in the third quarter of 2023. And this resilience has sparked speculation that the long-term neutral rate may have increased, suggesting that the Fed policy rate might not be as restrictive as previously thought.
Secondly, the term premium, which was suppressed for a long time, seems to be reversing. This could be due to investors demanding more compensation for volatility in longer term fixed income assets, or perhaps due to increased Treasury supply and concerns about fiscal sustainability at higher interest rates. The inability of Treasuries to hedge risk assets in the recent period, plus the attractive level of returns on cash, probably also are playing a role.
Nonetheless, from a portfolio perspective, valuations in the front and intermediate part of the curve look considerably more attractive and make us more positive on taking some additional duration risk in this part of the yield curve. We believe that high quality assets which have experienced widening spreads in 2023 are also worth considering in this environment.
Disclosure – the below is at the end of the video:
Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2023, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the viewer.
Prepared by BlackRock Investments, LLC, member FINRA
© 2024 BlackRock, Inc. or its affiliates. All Rights Reserved. BLACKROCK is a trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.
From ballast to returns: The role of fixed income in portfolios
Akiva Dickstein, Head of Customized and Short-Duration Active Fixed Income, discusses the changing role of fixed income in portfolios, his views on duration, interest rates and growth resilience. He also discusses where he sees compelling opportunity in the yield curve and the potential for high-quality assets in portfolios.
Why should investors consider active fixed income in today’s market?
We are arguably in one of the toughest macro environments today, where we think it's very difficult to forecast the next 3 to 5 years, because of a number of forces hitting the global economy today – many of which don't have historical precedent but could have massive impacts.
And if we think about the uncertainties we're facing today, to name a few, one, we have just experienced the fastest tightening cycle by the Fed in over 40 years. When and how that ends is still yet to be seen. Two, Europe is in a positive rate environment for the first time in nearly a decade and the growth and inflation trajectories there are much more unclear as well. And three, China growth and stability is now more uncertain, and what that means for global growth, US/China relations and deglobalization is still unknown. And these are just a few of the dynamics we are facing today.
So all of this is leading to a higher volatility, higher dispersion environment, but also one with greater opportunities in Fixed Income. So being active around sector, region and quality selection is key to managing the near-term dispersion, while also investing for these longer term dynamics.
What role should fixed income play in portfolios?
We're seeing one of the greatest opportunities in Fixed Income today, particularly around front to belly quality yielding assets that have incredible convexity for your portfolios. You can currently build a fixed income portfolio with a majority of holdings in high quality, investment grade, front to belly assets and currently yield 6 to 7% on the portfolio, while also running a lower volatility and lower duration risk profile.
We think the traditional 60/40 today can be more of a 60/30/10, where you can get your beta exposure through your 60 in equities, the 30 in fixed income, in high quality belly of the curve exposure, and your ten can be in more bespoke opportunities such as private credit, which can play a nice role as added upside potential to your overall portfolio.
Disclosure – the below is at the end of the video:
Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2023, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the viewer.
Prepared by BlackRock Investments, LLC, member FINRA
© 2024 BlackRock, Inc. or its affiliates. All Rights Reserved. BLACKROCK is a trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.
Maximizing returns: The importance of active fixed income
Hear from Charlotte Widjaja, lead portfolio manager, within BlackRock's Global Fixed Income on the importance of active fixed income in the current macro environment, the potential investment opportunities amidst heightened volatility and her views on why investors should reevaluate their 60/40 portfolios.
We're seeing one of the greatest opportunities in Fixed Income today, particularly around front to belly quality yielding assets that have incredible convexity for your portfolios.
What’s the outlook for inflation beyond the path we saw in 2022 and 2023?
Well, inflation's come down a fair amount, but it's likely to come down some more in 2024. We think mid-two’s is a reasonable expectation for core inflation by the middle of 2024. We have seen a lot of normalization in goods prices as supply chain issues have resolved. But importantly, services inflation remains somewhat high. We have had good supply developments on the services side, also through the labor market.
Wage growth is a risk to inflation going forward if it should hold up. So, the US is benefiting from these supply shocks. US improvement has been a little faster than some countries because of that labor market supply side improvement. But going forward there are still risks and the Fed is going to remain very vigilant.
After two years of rate hikes, what is the Fed’s main area of concern?
Well inflation is still somewhat high, and yet, real interest rates are also very high, so there's downside risks to the economy, but there's upside risks to inflation. And the Fed needs to get policy just right. It's a difficult challenge. Also, we've had a dynamic supply side recently with significant improvements in labor supply as well as the healing of the pandemic — good sector shocks. So, there's a lot of difficult things to judge for the Fed here.
Ultimately, you know, policy is just going to depend on hard data. The Fed has emphasized their data dependency, but there's a lot of judgment in this, and they're just simply going to watch. Is the economy going to be slowing sharply? And if they are, you know, then this hiking cycle will probably end.
Disclosure – the below is at the end of the video:
Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2023, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the viewer.
Prepared by BlackRock Investments, LLC, member FINRA
© 2024 BlackRock, Inc. or its affiliates. All Rights Reserved. BLACKROCK is a trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.
An outlook on rates and inflation
Watch James Sweeney, Head of Economics for BlackRock’s Fundamental Fixed Income Investment Group, discuss his outlook for inflation beyond the path we saw in 2022 and 2023 and his views on the Fed’s main area of concern after two years of rate hikes.
Inflation's come down a fair amount, but it's likely to come down some more in 2024. We think mid-two’s is a reasonable expectation for core inflation by the middle of 2024.