Fixed Income Highlights

  • All About That Pace…and More of My Favorite Themes for 2015. The Fed is bringing booty back (in the financial sense) and if persistent zero interest rates and QE led to dampened volatility, we should expect greater financial market volatility for 2015. Our outlook is one of continued low rates, but with increases led by the front end as the Fed raises rates around the second half of 2015.
  • You Don't Have to Live Like a Refugee. In a world of zero rates, finding income has been the dominant issue facing investors. The result has been refugee status of all things income—HY, REITs, dividends, etc. The big underlying driver has been the zero yields available on cash. Fed rate increases help to solve the income dilemma challenging the performance of income surrogates.
  • Shorten your duration, but don't own Short Duration. This theme makes a reprise this year, but we admit that we jumped the gun with it last year. When the Fed is raising rates, and we expect it to do so in June, then the largest impact will be felt in the shortest maturity yields.
  • The Conundrum in the Conundrum. The 2015 narrative on the U.S. longer maturity rate outlook borrows from 2004's "conundrum" (a term coined by then Fed Chair Greenspan on the surprisingly small increase in long-term rates as he was raising rates). An unraveling of the "conundrum" consensus or higher global yields undermines expectations for a repeat of 2014's long-end performance.
  • The Five Stages of Greece. One of the great consensus expectations for 2015 is the purchase of sovereign bonds by the ECB. But tight spreads and ultra low yields suggest this is already in the price. Given the low bar for European growth expectations, the ECB's announcement may be a better time to fade the compression theme in European rates as we expect the opposite trends for 2015.
  • History Doesn't Repeat Itself, but It Rhymes. The collapse in oil breaks the virtuous cycle of liquidity in credit markets. The result is that the credit cycle has turned. Rather than reaching for yield, we advise going up in quality, holding more liquidity for tactical investment opportunities in credit sectors like High Yield, Bank Loans and Emerging Markets.
  • Commodities, Inflation and TIPs. The continued collapse of inflation requires the unlikely scenario of a sustained pace of declines in oil. The contribution to inflation from oil should dissipate, clearing the way for modestly higher inflation. TIPs now look too cheap relative to CPI forecasts, making "breakeven" strategies attractive.

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What to Know—and Do—in 2015

THE BLACKROCK LIST
As the calendar turns to 2015, it's time to assess the investing landscape and your investment portfolio to ensure you're well positioned for the New Year. The List can help.

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 November 4, 2014, 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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