Strategic Income Opportunities Fund Monthly Insight

The new interest rate environment

Feb 27, 2019

This is what we love to do: find the best value in the world, build a balanced portfolio, seek consistent returns.

– Rick Rieder, CIO and Co-Head of Global Fixed Income

What the Fed’s pause on rate hikes means for investors.

Markets calmed and interest rates declined as investors reacted positively to the shift in central bank policy stance in January. Chairman Jerome Powell signaled the Fed’s willingness to be patient, step back, and evaluate economic conditions for a while before thinking about any additional rate hikes.

With short-term rates essentially “on hold” and not expected to rise any time soon, the strong demand for the U.S. dollar we’ve seen throughout 2018 is now likely to ease. Risk assets may benefit from some cheapening in the U.S. dollar as well as a more stable interest rate environment and a steepening yield curve as the central bank anchors the front end at today’s levels and possibly even lower.

The pause in Fed rate hikes suggests Treasury rates will be relatively stable from here and duration (sensitivity to interest rate movements) can again act as an important ballast to riskier exposures in a portfolio. As such, we increased duration in the BlackRock Strategic Income Opportunities Fund to 2.9 years in January. We now hold most exposure further out on the curve as yields on longer-dated Treasuries have moved modestly higher, with the benefit of more potential price appreciation should we see another risk-off move in the market. Click here for more fund positioning insights.

View fund commentary

We are looking forward to 2019 as the paradigm is changing. Spreads have widened and real rates have moved to attractive levels. The new landscape offers better opportunities for investors to generate returns without taking as much risk. Our outlook is shaped by some key investment themes, including:

1. Policy

The direction of markets will be driven largely by critical policy decisions, particularly the evolution of rate and liquidity policy by the Federal Reserve and potential trade and spending agreements reached (or not) in Washington, DC.

2. Liquidity

Central banks in developed economies have injected a tremendous amount of cash into the global monetary system in recent years. Today, that large supply of global liquidity is decelerating more rapidly than many anticipated, creating a more fragile backdrop for global economies and markets.

3. Volatility

Market prices may very well stabilize in 2019, and we might see bouts of upside and higher risk tolerance. Nevertheless, we’re expecting lower levels of economic growth in the U.S. and globally, and the possible risks from further Fed policy tightening and potentially higher levels of bond issuance are likely to keep markets volatile.

Click here for our views on these and more investment themes for 2019.

9 themes for 2019

Bob Miller
Head of U.S. Multi-Sector Fixed Income
Bob Miller, Managing Director, is head of the U.S. Multi-Sector Fixed Income team within BlackRock's Global Fixed Income group and a member of the Global Fixed ...
Rick Rieder
Chief Investment Officer and Co-Head of Global Fixed Income
Rick Rieder, Managing Director, is BlackRock's Global Chief Investment Officer of Fixed Income, and Co-head of BlackRock's Global Fixed Income platform, a ...