Fixed Income Highlights

  • In like a lion, out like a lamb. This month’s title refers not to weather but to market fears of rising rates. Those peaked on March 6th with a better-than expected employment report pushing the 10-year briefly to 2.25%. Weakening economic data and much more dovish guidance from the Federal Reserve reversed those trends, leaving the 10-year to end the month at 1.92%, fueling modest positive bond returns in March.
  • Mending the Gap. With this new guidance, the Fed went a long way towards closing the gap to market expectations. This is important in establishing the best possible environment for mitigating any potential negative market reaction to the first increase in interest rates. The implication for our outlook is that this lowers, but does not eliminate, the risks of rising interest rates this year in the front end of the curve. Reflecting this viewpoint, we cut our year-end 2-year forecast from 1.75% to 1.25% reflecting the lowered expectation for year-end 2015 fed funds rates, but leave our 10- and 30-year forecasts unchanged at 2.50% and 3.0%, respectively.
  • Cold Comfort. We note that lower bond yields in March came in an environment of steadily disappointing first-quarter economic data. The pattern of weak first quarter data has been the case for most of the past five years, but the second half has consistently outperformed. Notwithstanding these seasonal characteristics, the ongoing improvements in labor markets fueling rising incomes, falling oil prices fueling disposable income growth globally, and the rising confidence of business for capital expenditures and investments all point to a recovery in growth in the second half. Extrapolating lower rates from weak growth further pushing back the Fed from tightening therefore looks misguided.

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The sector performance and yields listed are represented by, respectively: Barclays US High Yield Index, S&P Leveraged Loan Index, Barclays US Securitized Ex-MBS Index, Barclays US Mortgage Backed Securities Index, Barclays US Corporate Investment Grade Index, Barclays Global Aggregate ex-USD Index, JP Morgan EMBI Global Diversified Index, Barclays US Inflation Protected Securities Index and Barclays US Treasury Index. The reference indices are represented by the Barclays US Aggregate and the Barclays Municipal Bond Index.

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.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

The opinions expressed are those of BlackRock as of March 6, 2015, and may change as subsequent conditions vary. Information and opinions are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable. The information contained in this report is not necessarily all-inclusive and is not guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. Reliance upon information in this report is at the sole discretion of the reader.

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