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The case for unconstrained fixed income in a volatile world

Jul 21, 2019
By Bob Miller, David Rogal, Rick Rieder

Fixed income investors are faced with mounting headwinds. An unconstrained approach may help.

Navigating the new reality in bond markets

After several years of slow-but-steady interest rate increases, rates have fallen significantly across the curve, and the world is awash in negative-yielding assets. Add in increasing geopolitical tensions, the rise of tariffs and the threat of full-blown trade wars, and it’s little surprise that we’ve seen a pronounced increase in volatility, as well as a reduction in liquidity, in fixed income markets.

Put it all together and it’s clear that generating attractive yield and total return while mitigating volatility is a serious challenge. We think an unconstrained strategy with a broad set of return drivers and a low volatility profile can help.

By pursuing opportunities throughout the fixed income universe, BlackRock’s Strategic Income Opportunities (SIO) composite has delivered a return stream that is diverse, highly differentiated to the Bloomberg Barclays Aggregate U.S. Bond Index and less volatile. (See chart below.)


More diversified, less volatile
Drivers of return since strategy inception (March 2010)

This chart shows drivers of return since strategy inception.

1. Yield to worst as of 31 May 2019. Yields for fixed income indexes are yield-to-worst, calculated based on all possible call dates, reflecting the lowest potential yield that can be received without the issuer actually defaulting.
2. SEC (K Shares) unsubsidized 30-eday yield as of 31 march 2019. SIO drivers of return as of 31 March 2019.
The above charts represent the performance attribution of the index and SIO from March 2019 through April 2019. March 2010 represents the strategy inception date. Spread for the index is the excess return. Past performance is not a guide to current or future performance and should not be the sole factor of consideration when selecting a product.

To get the most from an unconstrained strategy, we believe investors need to:

  • Source duration where it’s priced most attractively and access the broadest set of return drivers from across the global fixed income universe.
  • Avoid concentrated bets and seek out the many and diverse sources of alpha that markets offer.
  • Use a well-defined risk framework, and take risks that are thoughtful, targeted and focused on downside mitigation.

With the interest-rate outlook highly uncertain, the days when investors could look to traditional benchmarked strategies to meet all their needs appear to be gone, at least for some time to come. In this environment, we believe unconstrained fixed income strategies are more relevant than ever.

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Rick Rieder
Chief Investment Officer, Global Fixed Income
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Bob Miller
Head of Americas Fundamental Fixed Income, Global Fixed Income
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David Rogal
Managing Director, Multi-Sector Mutual Funds, Global Fixed Income
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