Fixed income

Fixed income in a new era: a dynamic approach

Below is an excerpt from the full report on a new dynamic approach for fixed income and case studies that show how the flexibility of SIO’s unconstrained approach has allowed the team to adjust duration and spread sector allocations to align with changing macroeconomic and financial market conditions.

Key takeaways

  • We believe markets will remain volatile and dispersion elevated in a new regime characterized by policy uncertainty
  • This new era necessitates a flexible approach that seek to optimize the potential for returns across the global fixed income market while effectively seeking to manage risks
  • A flexible approach may be able to dynamically adjust duration and credit positioning in seeking to capture potential dispersion-driven opportunities as they arise
  • A keen focus on risk management by maintaining a diversified* set of exposures can serve in seeking to create the potential of a more stable and durable return stream

*Diversification and risk management do not assure a profit and may not protect against loss of principal.

Heightened volatility is here to stay

For decades, low and moderate inflation has been the norm, a backdrop that beckoned an era of declining interest rates and attractive asset class returns. However, the past few years have shaken this paradigm: in the aftermath of COVID, we have seen unexpected vulnerabilities in global supply chains and markets have realized that forceful fiscal and monetary policy can inflame inflation and exacerbate volatility in financial markets. The rapid ascent in policy rates, the fastest campaign since the 1980s (Figure 1), has exposed economic weak links including some financial institutions and sectors that were dependent on lower rates.

In our view, this heightened backdrop of volatility is not a temporary spike; rather, it is a new regime characterized by financial markets waking up to risks that were once considered dormant. Markets are repricing the capacity for inflation to spike in response to supply and demand shocks, and investors recognize the unusual uncertainty in the range of decisions that policymakers may take. Looking ahead, we think inflation will likely cool from here, but a combination of geopolitical risks, tight labor markets and lingering productivity challenges in some segments could keep inflation elevated over the medium term.

Opportunities in fixed income

Discover how BlackRock's fixed income strategies could help you achieve your portfolio goals.
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New opportunities, new risks

While this heightened volatility has meant steep losses including a 10% drawdown in the Bloomberg US Aggregate Index since the start of 2022, it has also brought massive opportunity. Fixed income yields* have moved meaningfully higher over the past year as Federal Reserve rate hikes have pushed up risk-free rates. The higher level of the risk-free rate means that in an asymmetric growth shock, bonds may act as a hedge or diversifier in portfolios that have riskier allocations, given there could be considerable room for rates to rally if the Fed pivots and eases. This means that the menu of investment options seeking to reach a target yield has greatly expanded and investors may reach that target, without potentially having to reach aggressively into higher risk products.

Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation. Investors should consult their professional advisors for suitability of any investment considerations.

Change in fed funds rate

Why unconstrained?

Against this backdrop of heightened volatility in the current market, a flexible approach and positioning across the full investment landscape may tend to be more efficient over time than allocating to each sub sector individually. Additionally, flexible strategies may alleviate the need to adjust fixed income allocations in seeking to keep up with changing market dynamics, while striving to operate within the risk budget of many traditional fixed income portfolios.

Unconstrained fixed income such as the BlackRock Strategic income Opportunities Fund (SIO) can leverage a broader toolkit, may allow investors striving to capture the potential higher yields, while seeking to keep risks contained. Unconstrained strategies may flex up and down duration and weightings across sectors geographies and capital structures seeking to position opportunistically or defensibly in ways unavailable to benchmark-oriented strategies.


Rick Rieder
Senior Managing Director, CIO of Global Fixed Income
Russell Brownback
Senior Portfolio Manager, Fundamental Fixed Income
David Rogal
Managing Director, Senior Portfolio Manager, Fundamental Fixed Income

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