Strategic Income Opportunities Fund Monthly Insight

A clearer path toward normal policy

Sep 15, 2017

With financial conditions remaining easy, the Fed has the wind at their backs.

Financial markets aren’t the only place where volatility has been low. Many key measures of U.S. economic activity, such as core inflation and nonfarm payrolls, have also been hovering near historical lows.

Volatility in economic data has historically been driven by the boom-to-bust investment cycle in capital-intensive manufacturing sectors. But with the evolution of the U.S. economy into one that is more service-orientated, the significance of manufacturing sectors continues to decrease, meaning lower economic volatility could be a reality for years to come.

Historically Low Volatility Today for Nonfarm Payrolls

Chart: Historically Low Volatility Today for Nonfarm Payrolls

Source: BLS, Bloomberg as of 9/8/2017.

This stability in economic data combined with a prolonged period of low interest rates and a weaker U.S. dollar creates an environment of easy financial conditions, affording the Federal Reserve latitude to proceed with policy normalization.

On September 20th, the Fed announced its plan to begin gradually reducing the U.S. balance sheet in October. This effectively represents the Fed’s intention to stay the course on monetary policy normalization, despite what has been a somewhat disappointing series of inflation readings this year (with the exception of the August CPI print).

We believe the Fed is rightly focused on the big picture of what is happening in the economy. Given the incredible growth in employment and the Fed’s belief that inflation, although muted, will continue to move toward the 2% target over the next few years, moving away from emergency policy conditions makes sense.

Barring any unexpected shifts in inflation trends, we believe the Fed will carry out its plan for balance sheet reduction as scheduled, and we anticipate a rate hike in December and possibly two or three moves higher in 2018.

In the Strategic Income Opportunities Fund, we have reduced duration (interest rate risk) to 1.8 years. The fund holds a slight short position on the front end of the yield curve, with most duration exposure in the 3- to 10-year space (as of 8/31/17).

Outperformance with lower volatility

Chart: Outperformance with lower volatility

Source: Morningstar as of 8/31/17. Returns are from 8/31/16 through 8/31/17. Volatility is measured from 8/31/16 through 8/31/17 using daily returns. For standardized performance of the BlackRock Strategic Income Opportunities Fund,click here.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. All returns assume reinvestment of all dividend and capital gain distributions. Refer to blackrock.com/sio for current month-end performance. Investment returns reflect total fund operating expenses, net of all fees, waivers, and/or expense reimbursement. Expenses stated as of the fund’s most recent prospectus: Institutional Shares Total/Net, Including Investment Related expenses are 0.76%/0.75% and have contractual waivers with an end date of 4/30/18 terminable upon 90 days’ notice. 

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