Strategic Income Opportunities Fund Monthly Insight

What will the Fed do in 2018?

Jan 26, 2018

There is hardly any question that rates will rise this year, but the timing and pace remains to be seen.

We believe that today’s economy can grow faster than it has during the post-financial crisis period, despite relatively low inflation rates. Inflation readings are largely reflective of the prices of goods, while the U.S. economy has broadly shifted from a goods economy to a service-focused economy. Additionally, the pace of inflation has slowed over time as a result of greater efficiencies achieved in the historic transformation of the production, marketing and distribution of many of the core staples of the consumption basket. That includes everything from food and apparel to recreation goods. Going forward, we believe inflation will be influenced more by wages, particularly as we have approached full employment. Thus we keep a close eye on wages growth as a key determinant for predicting the Fed’s movements this year.

We think the Fed will aim for middle ground in raising rates this year. We expect a rate move in March, with two more hikes to follow during the year, with a chance of moving a total of four times; however, any pullback in growth, new or heightened geopolitical risk, or further moderation in inflation may put the Fed on a slower path. Hence, we think that three hikes should be the base case for 2018. When tightening policy, the Fed tends to be more reactive and deliberate in its moves than when easing. As such, we do not expect the Fed to act in an anticipatory manner, especially with inflation being so moderate relative to the robust level of economic growth.

In the Strategic Income Opportunities Fund, we reduced the fund’s duration during the month of December from 2.0 to 1.4 years given our expectation for higher rates in 2018. We added inflation break-even positions at the front end of the curve to help protect the fund from the impact of strengthening near-term inflation expectations. Although we reduced exposure to emerging markets in December, we still believe the sector should continue to be supported by growth in developed markets. We continue to favor securitized assets as they are in strong demand and can provide high levels of income in a low volatility environment.

Outperformance with lower volatility

Outperformance with lower volatility

Source: Morningstar as of 12/31/17. Returns are from 12/31/16 through 12/31/17. Volatility is measured from 12/31/16 through 12/31/17 using daily returns. For standardized performance of the BlackRock Strategic Income Opportunities Fundclick 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/sio for current month-end performance. Investment returns reflect total fund operating expenses, net of all fees, waivers, and/or expense reimbursement. Expenses stated as of the fund’s most recent prospectus: Institutional Shares Total/Net, Including Investment Related expenses are 0.76%/0.75% and have contractual waivers with an end date of 4/30/18 terminable upon 90 days’ notice. 

Read more about how the Strategic Income Opportunities portfolio management team is monitoring the Federal Reserve's 2018 policies.

View fund commentary

Strategic Income Opportunities Monthly Insights

Subscribe to get timely market outlooks and portfolio positioning insights every month.