Fixed Income Highlights

  • Divergence in Divergence. Declining U.S. growth and rising European growth in the first quarter looks less like divergence and more like convergence. U.S. rates fell from their early March peaks while European rates bounced off of their QE-induced "negativity" prompting U.S. rates to follow suit at the end of April. Looking forward the U.S. data cycle looks to turn upwards, and with rising European rates undermining the "low global yield" consensus, we look for modest pressure for higher rates. Risk assets appear far too complacent to such an inflection point, leading us to upgrade our caution over the next few months.
  • Mind the Basis … and a New Source of Euro Sovereign Supply. Rising costs of currency hedging undermine the U.S. yield advantage. The recent ECB lending survey indicates a rising supply of euro debt as banks plan to reduce their holdings. Combined with higher yields at the end of April and better European economic prospects, it suggests the turn in European rates may have been reached.
  • The Final Stage in the "Five Stages of Greece." Greece is moving towards the final stage of the "Five Stages of Greece," our long-running theme best describing the emotional character of the Greek drama. As Greece looks to potentially run out of money this month, "acceptance" either of the eurozone conditions or of the consequences of an exit brings us to the final stage of this long-running saga. The decision hinges on political rather than economic rationale, as the essential contradiction proposed by Greek political leaders that they can stay in the eurozone while avoiding its requirements appears about to be put to the test. While global investors will watch with interest, the facts and circumstances today argue for far less financial market significance than in prior episodes.

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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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