A realistic view on rates

March 15, 2021

Interest rates may drift higher in the coming months, but the robust
growth backdrop remains supportive of risk assets, in our view.

Risk assets generally ended February higher, but similar to January, sold off at month end. However, instead of rising inflation expectations, this time the cause was a spike in interest rates driven by higher real rates. (“Real rates” refers to inflation-adjusted interest rates.)

While the absolute level of interest rates remains historically low, the speed of last month’s move unnerved investors and called into question the lower-for-longer environment that has underpinned the market recovery. Consequently, growth stocks, which have been some of the biggest beneficiaries of low rates, came under increased pressure, whereas income-oriented asset classes like high yield and dividend stocks held in much better.

We think rates can drift higher in the coming months, fueled by an acceleration in vaccine-led reopening activity and higher inflation. However, the robust growth backdrop remains supportive of risk assets. And even though investors now think the Fed will hike rates earlier than was originally forecast, we expect the Fed to reiterate its dovish stance and remind investors that policy remains incredibly accommodative.

Additionally, as rates move higher, we believe the market impact will be limited given investors remain hungry for high quality, higher yielding assets. We saw evidence of this on the last day of February as yields retreated from their highs.

The BlackRock Multi-Asset Income Fund fared well amid the rate increase, as our duration stance (sensitivity to interest rate movements) remains near the fund’s all-time low. For now, we are maintaining this position but may look to add duration should rates continue to grind higher. At higher yields, duration can serve as an important ballast in a diversified portfolio.

We continued to take profits across lower yielding bond markets with limited upside potential, such as CLOs and preferred stocks. For the near term, we’re comfortable holding modestly higher levels of cash, partially to hedge risk, but also to take advantage of opportunities should more attractive entry points develop.

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Michael Fredericks
Michael Fredericks
Head of Income Investing for BlackRock Multi-Asset Strategies Team
Michael Fredericks, Managing Director, is head of Income Investing for the BlackRock Multi-Asset Strategies & Solutions group and lead portfolio manager for the ...
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