Total Return Fund Monthly Insight

Selective sector positioning in fixed income

Jun 20, 2018

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

Securitized assets, such as non-agency mortgages and collateralized loan obligations, performed well in May, as they often do in a low-yield environment. Holding an overweight to the sector helped drive positive performance in the BlackRock Total Return Fund during the month, while an overweight to emerging market debt hindered results given selling pressure in the sector as the U.S. dollar strengthened.

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 5/31/18. 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.

During the month, we narrowed the fund’s underweight duration position relative to the benchmark index, ending the month of May with an effective duration of 5.70 years. We continue to hold a yield curve-steepening bias with an overweight on the front end, where we see attractive yields with less sensitivity to higher interest rates. We believe long end rates will move marginally higher in the medium term amid solid global growth, inflation that is firming yet contained, and broadly less accommodative monetary policy from developed-market central banks.

Amid tight valuations and the risk-off market tone since the beginning of February, we remain neutral in investment grade credit, although we recently added to some shorter-dated bonds at attractive entry points. We maintained the fund’s small allocation to high yield credit as the sector performed well this past month. We continued to hold an overweight in agency mortgages and increased our overweight to municipals as a high-quality diversifier away from corporate bonds and longer-dated Treasuries.

We reduced the fund’s overweight exposure to emerging markets as the sector continued to see selling pressure this month, but we maintain positions in select countries where fundamentals remain supportive, including Brazil, Argentina and Mexico.

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