Bonds are the foundation for a diversified portfolio and play a critical role in periods of heightened volatility. However, muted market returns, historically low interest rates and increased volatility mean that building a bond portfolio today will require new skills, deeper insights and more sophisticated tools.

What are today's bonds challenges?

What worked in the past may not work going forward given today’s challenges. Consider adapting a bond strategy to address these challenges:

  • Higher volatility. Now that equity market volatility is on the rise, it is important to remember that traditional bonds have historically offered downside protection when equity markets declined.
  • Navigate changing bond markets. We’re entering an uncertain stage of the interest rate cycle, in which short-term rates may rise but longer-term rates should remain low. As bond volatility is also likely to increase, being nimble is more important than ever.
  • Access a wider opportunity set. With dispersion in global growth, monetary policy and fixed income performance, investing in a global bond portfolio may create more opportunities to source returns and diversify globally.

 

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Balance your stock portfolio

Even in this low rate environment, bonds still delivered downside protection.

BOND VS. STOCK PERFORMANCE DURING RECENT MARKET DRAWDOWNS
Average monthly returns during equity market drawdowns >-2% (3/31/11–3/31/16)

Chart: Bonds vs. stocks performance

Source: Morningstar 3/31/2016. An equity market drawdown is defined as a period in which the S&P 500 fell by 2 or more percent. Based on 10 monthly periods from 3/31/11-3/31/16. Past performance does not guarantee or indicate future results. You cannot invest directly in an index. Index performance is shown for illustrative purposes only.

 

BlackRock’s traditional taxable and municipal bond funds offer diversification benefits and can help serve as a potential ballast to equity market risk:

Stay flexible and nimble

The fund has delivered competitive performance when compared to the Morningstar Intermediate-Term Bonds, Short-Term Bonds and Nontraditional Bonds category averages.

STRATEGIC INCOME OPPORTUNITIES FUND OUTPERFORMED
Annualized return since strategy inception*

Chart: Strategic Income Opportunities fund outperformed

Source: Morningstar as of 3/31/2016. Morningstar category averages are used for Intermediate-Term Bonds, Short-Term Bonds and Nontraditional Bonds data. The Morningstar Nontraditional Bond category contains funds that pursue strategies which seek to avoid losses and produce returns uncorrelated with the overall bond market. *Annualized returns from 3/31/10–3/31/16. 3/31/10 is when Strategic Income Opportunities Fund’s investment strategy changed.

 

Flexible bond funds allow skilled managers to quickly navigate a more challenging interest rate and credit environment, while seeking broader opportunities to enhance returns:

Go global

Investors are significantly overweight U.S. bonds despite U.S. bonds being less than 50% of the global bond markets and global central banks being more accommodative than the U.S.

A DIVERGENT WORLD
A global monetary-policy landscape

Chart: A divergent world

Sources: BlackRock Investment Institute, central bank websites and IMF, December 2015. The chart shows the latest central bank policy move in 2015 as of December 2015 in the 75 largest economies by GDP, calculated on a purchasing power parity (PPP) basis. Countries are scaled by their size by GDP (U.S. dollar). Labeled countries from left to right are: Japan, Spain, Italy, Netherlands, Sweden, Belgium, France, Germany, Australia, Taiwan, Switzerland, Russia, Korea, Canada, Nigeria, Poland, Indonesia, Turkey, India, China, U.K., Argentina, Mexico, Saudi Arabia, Brazil and U.S.

 

Global bond funds can provide access to regions where monetary policy is accommodative, helping to diversify your fixed income risks and potentially offering greater return opportunities:

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