Highlights

  • What's our outlook for the 10-year? In an era of zero interest rate policy (ZIRP), only the outlook for the 10-year mattered. But that era is rapidly coming to an end—we forecast by the end of this year the Fed will signal its shift away from zero interest rates—and along with it a fixed income strategy that depends only on the outlook for 10-year (or longer maturity) interest rates. As that historic shift away from ZIRP occurs, investors need to rethink their fixed income strategies beyond simply how much duration they hold to where they hold that duration.
  • Dude, Where's My Duration? That outlook leads to this month's lowbrow pop-culture title reference. Interest rate exposure by maturity matters more to performance in an environment of "normalization" of interest rates. And not all fixed income asset classes are created equal—or have equal interest rate sensitivity along the curve. Seeking safety in the front end of the yield curve? You may have just jumped out of the frying pan and into the fire.
  • What is normal? In its simplest terms, "normal" monetary policy starts with a positive "real" interest rate. That means investors can save in the "riskless" asset of government bonds without the loss of purchasing power to inflation. The Fed calls its current policy "highly" accommodative. If it stays true to its policy of "data dependence" (noting the data show a strengthening economy), simply moving from "highly" to "merely" accommodative implies a 2% fed funds rate.

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Concerned About Fixed Income?

BlackRock is uniquely positioned to support your allocation to bonds.

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 October 3, 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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