Normalizing normalization

17 mar 2017 / por Jeffrey Rosenberg

The Federal Reserve’s rate rise this month marks a departure from the glacial pace of the past two years. In effect, the Fed looks set to start normalizing its pace of normalization, although we see it ending at a lower peak fed funds rate than in the past.

Fixed income highlights

  • The March rate increase suggests a quicker pace of tightening – even as structural forces such as aging populations point to a shallower tightening path than in the past. Better growth and deft Fed messaging have smoothed the policy shift so far.
  • Market expectations for the path of rate rises still trail the data from Fed policymakers. Hawkish Fed rhetoric or unexpectedly strong economic data could lead to overshoots in tightening expectations, causing market turbulence.
  • Rising rates will restore yields on cash and other low-risk assets. This should eventually curb the appetite for yield in higher-risk fixed income sectors. It could be a rocky transition given lofty valuations in many of these sectors.


Yield spreads have tightened significantly, whether it be in U.S. high yield, hard currency emerging market (EM) debt or U.S. investment grade bonds. These elevated valuations may be a sign of market complacency, we believe. There is a much thinner yield cushion against the risk of rising interest rates then in the recent past. See the chart below. The Fed appears aware of this risk, so is proceeding cautiously and gradually with rate rises.

Valuations signal “risk-on”
Bond spreads, 2011-2017

Valuations signal Bond spreads, 2011-2017

Sources: BlackRock Investment, Bloomberg and JP Morgan, March 2017. 
Notes: Yield spreads are versus U.S. Treasuries. U.S. investment-grade and high-yield debt spreads are based on Bloomberg Barclays indices. The EM hard-currency debt spread is based on the JPMorgan Emerging Market Bond Index.

Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Fixed Income Strategist with responsibilities in developing BlackRock's strategic and tactical views ...