Total Return Fund Monthly Insight

Bond outlook remains positive despite
February woes

Mar 19, 2018

Subscribe Now

Valuable opportunities exist in bonds as global growth continues.

The February selloff was not the result of issues relating to fixed income fundamentals, in our view, and we generally remain positive on the market overall. We expect to see a continuation of synchronized global growth in the medium term with a modest, cyclical uptick in inflation. From a fiscal policy perspective, we believe the closely examined U.S. tax reform plan is a near-term positive for growth, while on the monetary side, we expect developed-market central banks to continue moving toward less accommodative policies.

We increased effective duration of the Total Return Fund from 5.18 to 5.75 years over the month of February, narrowing the fund’s underweight relative to the benchmark index. We continue to hold a yield curve-steepening bias with an overweight to duration on the front end of the curve. We believe long-end rates will move marginally higher in the medium term amid solid global growth, a cyclical but modest uptick in inflation, and broadly less accommodative monetary policy from developed-market central banks. We expect investors will require more yield for longer-dated bonds given the strong global growth backdrop. We closed the fund’s positions in Treasury inflation-protected securities as market inflation expectations repriced higher with the recent stronger data.

The fund's diversified sources of return across fixed income asset classes

Chart: The fund's diversified sources of return across fixed income asset classes

Source: BlackRock as of 2/28/18. Quarterly return attribution is based on gross returns of the fund’s Institutional share class. U.S. Relative Value: The fund’s U.S. relative value strategies reflect the portfolio management team’s specific views on the mortgage market. Macro: The macro strategy is how the portfolio management team implements thematic and macro-economic investment views through duration, yield curve and foreign-currency positioning. Residual: This non-attributable portion of the fund’s total return is derived from trading and allocation effects across the fund’s investment strategies. For standardized performance, 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 for current month-end performance.

Given tight valuations, the fund holds a neutral position in investment grade credit. We prefer to hold specific names in this sector rather than broad index exposure. The fund’s small allocation to high yield credit was maintained and we may add to this exposure if valuations cheapen further. We continued to decrease the overweight in municipals as strong flows into the sector at the start of the year have richened valuations.

We believe securitized assets, including non-agency mortgages and collateralized loan obligations, should continue to experience strong demand as yields remain low overall. In the fund, we maintained an overweight to emerging markets as we believe the sector should continue to be supported by synchronized global growth and strong fundamentals. We increased exposure to Argentina at an attractive entry point created by the market selloff. We continue to hold high-conviction views in other select countries including Brazil and Mexico.

View fund commentary

Total Return Fund Monthly Insights

Subscribe to get timely market outlooks and portfolio positioning insights every month.