Fixed Income Highlights

  • One Pill Makes You Larger. And one pill makes you small. While the Fed took the one making QE smaller, the Bank of Japan took one making it larger. And yes, the ECB continues to take the "ones that mother gives you" that don't do anything at all. For the U.S. interest rate outlook, expanding global QE helps restrain the rise in longer-dated yields.
  • A Surprisingly Hawkish Fed and, Finally, Rising Wages. The market read the October FOMC statement as surprisingly hawkish. But the Fed's surprise upgrading of the labor market proved prescient as the 3Q Employment Cost Index finally showed accelerating wages. Wages are the most lagging of lagging indicators highlighting that the well-entrenched though not particularly robust recovery no longer justifies emergency Fed support. We continue to expect the Fed to exit from zero interest rates before the market does and for that to lead to the largest increases in shorter maturity yields.
  • Return to Achnacarry Castle. In 1928, the leaders of the global oil industry met at Achnacarry Castle, signing what became known as the "Achnacarry Agreement" to control global petroleum production. It didn't work. Today, a debate rages of a return of sorts. Falling oil prices reflect dramatic changes in the marginal supply of oil, shifting expectations for demand and, critically, a change in the outlook for monetary policy strengthening the dollar and weakening its equivalent measure in the price of oil.

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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 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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