Fixed Income Highlights

  • The difference between risk and uncertainty. Economist Frank Knight distinguished between risk and uncertainty as the latter being something immeasurable. Unprecedented intervention by global central banks introduces uncertainty, not risk, the latest iteration being that of the ECB, and the prime example the unexpected revaluation of the Swiss franc. Central bank policy distorts financial markets, rendering prices less reflective of fundamental valuations and prone to large moves as distortions are reassessed. That uncertainty is impossible to measure, leaving portfolio risk unquantifiable.
  • Grecian Formula.The successful snap election of the left-wing Syriza party to lead Greece's government has resurrected the specter of a "Grexit" in the eurozone. However, at the time of writing, headlines appear suggesting a compromise and solution may be about to be reached. The Greek drama, for whatever its economic merits, now represents essentially a political risk. Political risks render the measurement of financial risk difficult, leaving Knightian uncertainty rather than "risk" for investors. The implication is that risk in other areas of the portfolio end up being reduced, effectively spreading the Greek uncertainty into other financial markets.
  • The Wages of Fear. January's payroll figures highlighted continued strength in the labor market, contributing to our expectation of a June hike. An unemployment rate of 5.7% and a three-month increase in nonfarm payrolls of over one million, the largest three-month change in jobs since 1997, make it increasingly difficult for the Fed to justify emergency-era policy. However, for many on the FOMC, the lack of wage inflation in the context of overall inflation far below target remains a reason for delaying hikes, making wage data critical to expectations for Fed policy.

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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 February 13, 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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