Total Return Fund Monthly Insight

Strategizing around interest rates

Sep 20, 2018

How we’re positioned for today’s bond markets.

U.S. economic data has remained resilient and we expect the current level of growth to continue for the near term. In this environment, we expect longer term interest rates to move marginally higher as Treasury supply increases and developed-market central banks broadly shift toward a less accommodative stance on monetary policy.

In the BlackRock Total Return Fund, we have continued to increase duration (sensitivity to interest rate movements), with a preference for shorter-dated Treasuries. We ended the month of August with an effective duration of 6.33 years and a yield curve-steepening bias with an overweight on the front end where we see attractive yields at a low level of risk.

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 8/31/18. 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.

We tactically reduced exposure to investment grade credit as we anticipate supply to increase in the near term due to elevated merger and acquisition activity. We maintained the fund’s small allocations to high yield credit and bank loans as these sectors have performed well relative to other credit sectors.

We maintain overweights in agency mortgages and municipals as these strong-performing, high-quality assets help to diversify risks relating to corporate bonds and 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.

We continued to reduce the fund’s emerging markets overweight as a stronger dollar, global trade tensions, and local political uncertainty are headwinds for the sector. However, this dynamic has also created more value and buying opportunities in countries where fundamentals remain solid, in our view, and therefore we continue to hold select positions in China, Argentina and Mexico.

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