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Fixed Income

Rethinking the role of bonds

We see three areas of opportunity where fixed income strategies can help investors position portfolios for the rocky times expected ahead.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

New market regime for fixed income

Fixed income investors are facing a new market regime with heightened volatility, persistently high inflation, and tighter monetary policies. Meanwhile, the reallocation of assets into sustainable strategies continues to accelerate. We expect these realities to persist, but we also see areas of opportunity in fixed income markets.

Opportunity in adversity

Against this backdrop, we see a key role for fixed income in portfolios – but it needs to evolve. As investors rethink the role of bonds, we expect more dynamic decision-making in asset allocation and product implementation. This could include:
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Attractive opportunities in credit
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Nimble adjustments can help navigate the new market regime
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A window of opportunity in the shift to sustainable investing

Risk: When interest rates rise, there is usually a decline in the market value of bonds, and the issuer of the bond may not be able to repay and make interest payments.

Attractive opportunities in credit

We believe investors can navigate volatility and generate steady income by owning high-quality fixed income assets such as investment grade and high yield credit. With yields at a record 10-year high, this asset class offers attractive opportunities for investors seeking to meet their return objectives while taking less credit risk.

Investment grade credit could help investors prepare their portfolio for the late-cycle phase - characterised by slowing growth and increased market volatility – and weather a recession better than stocks.

We see higher yields as a gift to investors long-starved of income in bonds – and investors no longer need to take significant credit risk in exchange for yield. We believe that higher-quality high yield credit could help investors gain additional income in their portfolios, without exposing themselves to the higher default rates seen further down the quality spectrum.

Nimble adjustments can help navigate the new regime

The new market regime calls for rethinking the role of bonds in portfolios, and leveraging different tools and implementation approaches. It will also require taking more granular views by focusing on sectors, specific duration exposures, regions and sub-asset classes, rather than allocating to broad exposures.

Short duration strategies

Short duration strategies offer an attractive risk-adjusted opportunity and can potentially reduce volatility in portfolios. In fact, the jump in yields seen in 2022 reduces the need to take risk by seeking yield further out the curve1, with short-term bonds offering yields comparable to their longer maturity counterparts, while carrying significantly less interest rate risk. In this environment investors could consider short duration exposures as part of their fixed income toolkit.

Top index and active funds per classification, based on AUM, as of 9 December 2022

1Source: BlackRock and Bloomberg, as of 30 November 2022.

Unconstrained active fixed income funds

Active unconstrained fixed income strategies can be used as portfolio diversifiers for investors seeking attractive global opportunities across the full spectrum of the fixed income universe. These strategies can rotate across any sector without being limited by benchmark constraints, allocating only to sectors we feel are best placed to navigate this regime of heightened volatility. The dynamic duration management of unconstrained strategies can help navigate macro volatility, helping to protect total returns in a rising-rate environment.

Top active funds per classification, based on AUM, as of 9 December 2022.

A window of opportunity to navigate the shift to sustainable

Sustainable fixed income AUM has increased by 26% worldwide across all sectors since 20182.

As the growth of sustainable investing continues to accelerate, many investors are seeking comprehensive active strategies and efficient index building blocks to transition their fixed income portfolios. We believe that today’s volatility and the expected adjustments to asset allocations offer a window of opportunity to reinvest in fixed income while positioning for the energy transition.

Evidence shows that investors favour companies seen as better prepared for the energy transition. As investors continue to shift their portfolios towards sustainable investments, we expect such funds to provide a return advantage over the long term.3

2Source: Simfund for US mutual funds, Broadridge for non-US mutual funds, GBI iShares for global ETFs, Fund of funds (FoFs) and closed-end funds excluded. Yearly data reflected in the bar chart. YTD 2022 includes data from 1 January 2022 until 31 May 2022.

3Source: BlackRock investment institute, as of 31 July 2022.

BlackRock can help you rethink the role of fixed income in your portfolio

The ongoing uncertainties call for a more flexible and diversified whole-portfolio approach in fixed income. More investors are using bond ETFs for flexibility and as cost-efficient building blocks. They are blending them with active strategies that seek to meet specific investment objectives and avoid unwanted risks4.

The BlackRock Portfolio Consulting Team can help you evaluate, evolve, and build a fixed income portfolio that meet your investment needs.

4Source: BlackRock investment institute, as of 30 November 2022.

Key points



Your existing fixed income allocation to help understand what drives risk and return in your portfolio with precision – ensuring that your investment decisions are working holistically towards your intended portfolio outcome. We can stress-test your portfolio to analyse the impact on efficiency, liquidity and risk/return profile.



Your portfolio by identifying areas to enhance overall efficiency, or to incorporate new investment themes beyond your area of expertise. As investors’ asset allocations become more dynamic, we can help you build a flexible strategic asset allocation, so you can be nimble even in the face of extreme market volatility.



More efficient fixed income portfolios. When you move from strategic portfolio construction to a holistic implementation approach, the choice of instruments employed is key. Investors should use all available tools in the box, spanning both index and alpha-seeking strategies.

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