Total Return Fund Monthly Insight

Growth continues to sustain the
bond markets

Apr 20, 2018

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Global and domestic growth have continued to provide bond investors with opportunities.

Over the past month, we believe the higher market volatility does justify the pause in investor sentiment, and we generally remain positive on the overall market against a backdrop of resilient growth. 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 maintained the fund’s underweight duration position relative to the benchmark index, with a month-end effective duration of 5.58 years. We continue to hold a yield curve steepening bias with a preference for duration on the front end of the curve given attractive yield with less sensitivity to rising interest rates relative to longer maturities.

In our view, 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 hold modest inflation expressions in 3- to 5-year Treasury inflation-protected securities as we believe market expectations are underestimating future rates of inflation.

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 3/31/18. 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 blackrock.com/tr for current month-end performance.

Amid tight valuations and a risk-off tone in the market, we remain neutral in investment grade credit, where we prefer to hold specific names rather than broad index exposure. We maintained the fund’s small allocation to high yield credit and we may add to this position if valuations cheapen further. In addition, we moved to an overweight in agency mortgages and maintained the fund’s overweight to municipals as these high-quality sectors provide diversification versus longer-dated Treasuries.

We believe securitized assets, including non-agency mortgages and collateralized loan obligations, should continue to experience strong demand in this low-yield environment. Although we slightly reduced the fund’s overweight exposure to emerging markets, we continue to believe the sector will be supported by ongoing synchronized global growth and strong fundamentals. We hold high-conviction views in select countries including Brazil, Argentina and Mexico.

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