Fixed Income Highlights

  • Prepare for Liftoff... The March FOMC meeting provides the Fed its likely opportunity to prepare financial markets for the long-awaited—and debated—liftoff from zero interest rates. As we argued in our lead theme for 2015 — "All About That Pace" — what happens next will dominate the outlook for fixed income performance this year. For after liftoff the question becomes, what's next?
  • changing forward guidance. Fed Chair Yellen, in her semi-annual monetary policy report to Congress last month, provided much of the likely formulation for the evolution in the Fed’s communications, indicating that "the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance." Expect "patient" to be dropped and replaced with the key phrase “reasonably confident" from this line in her February testimony: “The Committee anticipates that it will be appropriate to raise the target rate for the federal funds rate when, on the basis of incoming data, the committee is reasonably confident that inflation will move back over the medium term toward our 2% objective." That ushers in inflation as the key to the outlook for "that pace" of normalization.
  • Green Shoots in Europe. The ECB's staff forecast upgrades highlight the improvement in the European economic outlook. Though the initial market reaction to the announcement of QE has been to further compress bond yields, improving economic performance in Europe may eventually undermine these QE expectations already firmly anchored in prices. That suggests some rate vulnerability in and around Europe, including the back end of the U.S. rate curve.

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An adaptable approach for today's changing bond markets

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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