Our Christmas Shopping List (and some 2023 Prognostications)

Dec 20, 2022
  • BlackRock

Rick Rieder and team outline how to think about portfolios as we enter 2023.

1 or more years of additional interest-rate duration in ‘23 vs. ‘22, to be grown over time: As central banks slow, or pause, their tightening cycles, in sympathy with slowing economic growth and inflation.

2 years of locked-up returns in fixed income assets, at a generational inflection point in yields: A decline in inflation volatility suggests a decline in interest rate volatility too, both from extreme levels.

3 -handle inflation by the end of 2023, driving a decline in rate volatility: Oil’s falling price means it is becoming a deflationary impulse, and leading indicators for housing suggest a correction is in motion (the highest-beta and largest components of CPI, respectively).

4 more months (or less) of data/policy uncertainty, after which the Fed can pause: The market has fully priced in another 100 basis points (bps) of hikes over the next four months.

5 years of runway potential for fixed income to generate outsized returns: The higher we climb up the discount rate mountain, the more vertical is created on the other side.

6% to 6.5% of portfolio carry potential (including anticipated curve rolldown): Without needing to take on much duration, credit, convexity or illiquidity risks.

7% carry (including rolldown) potential in U.S. Investment-Grade: Based on historical returns, at similar entry yields.

8 or a high single digit number of significant defaults in 2023: We have probably left the 1% default rate in high yield behind us, but we don’t anticipate seeing 2009’s 13% either.

9% nominal GDP may be behind us, but we won’t dip much below 4% NGDP (while the 7 years before the pandemic averaged 3%): The strong labor market will keep real growth from collapsing, even as inflation slows.

10% potential return on mortgages, if yields just went back to the 83rd percentile from over the last 10 years (from the 98th percentile, currently): Supported by shelter inflation that is slowing, but a housing market that is not going into a bust.

11% carry (including rolldown) potential in U.S. High Yield, for those able to venture into the right places: Keeping in mind that defaults will probably rise off record lows, making selectivity critical.

12 months of carry in fixed income hasn’t been this exciting in many, many years!

…and a bunch of equity gamma, funded by a portion of that fixed income carry, to capture the potential for right-tail risk.

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Rick Rieder
Managing Director, CIO of Global Fixed Income, Head of Fundamental Fixed Income, Head of Global Allocation Investment Team
Russell Brownback
Managing Director, Head of Global Macro Positioning for Fixed Income
Trevor Slaven
Managing Director, is a portfolio manager on BlackRock’s Global Fixed Income team and is also the Head of Macro Research for Fundamental Fixed Income
Navin Saigal
Director, is a portfolio manager and research analyst in the Office of the CIO of Global Fixed Income, and he serves as Chief Macro Content Officer