Do you have hidden risks in your
bond portfolio?

Investors use bonds for a variety of reasons, whether it be to diversify equity risk, seek stability from rising interest rates, or simply generate income. However, we have found through our review of hundreds of client portfolios that there may be more risk that investors are taking on than they realize.

Three common hidden risks we have uncovered in client portfolios include:

Equity risk

Bonds are behaving too much like equities. Corporate and high yield bonds are typically affected by the same factors that drive equity markets.

If your goal is to diversify stocks, consider core bonds which have delivered positive returns when stocks were down.

Average calendar year returns when the stock market was negative.1

Equity Risk

Performance data quoted represents past performance and is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

1Source: Morningstar as of 12/31/16. Core bond returns represented by IA SBBI IT Govt Index from 1926 to 1975 and the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 to 2016. Stock returns are represented by IA SBBI Large Stock Index from 1929 to 1970 and the S&P 500 Index from 1971 to 2016. High yield bond returnsrepresented by Bloomberg Barclays U.S. Corporate High Yield TR USDIndex from 1984 (when HY was introduced to the market) to 2016.

Interest rate risk

Not all bonds are the same. While core bonds play a critical role in your portfolio, they may not guard against rising interest rates. As a result, your portfolio could lose value if interest rates go up.

Consider adding flexible bond funds that actively adapt to different interest rate environments and funds that specifically seek to balance credit risk and interest rate risk.

Interest Rate Risk

Yield risk

Investors who tend to be more conservative might lean toward cash and traditional bond strategies for a measure of stability, but this comes at a cost.

In low-yield environment, achieving an income stream requires taking on some risk. Consider adding high yield or international bonds to seek to generate income.

Yield risk

Source: BlackRock, Morningstar. As of 9/30/16. Assumes constant annual inflation rates. Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Cash is represented by the Barclays U.S. 1-3 Month Treasury Index. Cash returns from inception of index, 11/30/1991. Inflation is represented by the Consumer Price Index. Index performance returns do not reflect any management fees, transaction costs or expenses.

Points for professionals

  • Talk to your clients about the role bonds play in their portfolio and how to properly manage the associated risks.
  • To learn more about how BlackRock can help your clients’ hidden risks, visit blackrock.com/blindspot, contact your BlackRock representative,  call 1-877-ASK-1BLK (275-1255) or email askblackrock@blackrock.com.

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