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Strategic Income Opportunities Fund Monthly Insight

Firming up inflation expectations

January 22, 2020

A soft month of data doesn’t change our view for the year ahead.

Core inflation readings for December came in softer than expected, with a 0.1% increase month-over-month and 2.3% year-over-year. But inflation has maintained the firming tone that we expect to be sustained through the first half of this year before moderating in the second half.

Some of the factors that we think will put upward pressure on inflation in the coming months are the waning strength of the U.S. dollar and some strength in commodity prices, which is likely to boost input pricing.

That said, given the Federal Reserve’s recent statement that it’s likely to look past near-term inflation increases, we still expect the central bank to be on hold for much of the year. In fact, we view the bar for hiking rates as considerably higher than the bar for further easing.

In the BlackRock Strategic Income Opportunities Fundwe slightly decreased the fund’s duration (interest rate risk) in December while remaining on the higher end of the fund’s historical range. We continue to favor the front end of the yield curve as a portfolio hedge. We reduced exposure to the 7- to 10-year part of the yield curve, which we believe may be more vulnerable to modest upticks in economic growth and inflation.

We increased exposure to agency mortgages, where relative value has remained attractive and demand from banks and foreign investors has continued to be robust. We also increased exposure to inflation-protected bonds and emerging market debt. Conversely, we reduced exposure to investment grade credit given richer valuations, particularly in the financial sector.

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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 Income ...
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 member of ...