Stick with bonds for ballast


Bonds are important portfolio diversifiers, despite their low yields. Municipal bonds and TIPS are compelling options given a dovish Fed and potential for an uptick in U.S. inflation.

Given the risk of volatility shocks in equities, bonds remain an important hedge and diversifier. In the 11 periods since 2010 when the S&P 500 Index fell more than 2%, bonds provided a critical offset by appreciating as stocks declined. (See graph below.)

Bond vs. Stock Performance During Equity Market Drawdowns

Graph: Bonds provide an effective hedge to equities
Source: Morningstar, as of April 2016. Notes: An equity market drawdown is defined as a period in which the S&P 500 fell by 2% or more. Based on 11 monthly periods from 12/31/10–12/31/15. Represented indexes (left to right): S&P 500 Index, Barclays U.S. Aggregate Index. Past performance does not guarantee or indicate future results. You cannot invest directly in an index.

We also like Treasury Inflation Protected Securities (TIPS) as a replacement for nominal Treasuries in a broadly diversified portfolio. TIPS provide an attractive hedge to a scenario in which the Fed remains on hold for longer while U.S. inflation ticks up. These two options offer the opportunity to achieve ballast versus both stock and nominal Treasury risks, while building in inflation protection and tax-advantaged income benefits.


Graph: U.S. tips can offer attractive value
Source: As of July 2016, Source: Bloomberg

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting blackrock.com/latamiberia. Read the prospectus carefully before investing.

1If the index measuring inflation falls, the principal value of inflation indexed bonds will go down and the interest payable will be reduced. Any increase in the principal amount will be considered taxable ordinary income. Repayment of the original bond principal upon maturity (adjusted for inflation) is guaranteed for U.S. Treasury inflation indexed bonds. For bonds that do not provide a guarantee, the adjusted principal value repaid at maturity may be less than the original principal.

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