Strategic Income Opportunities Fund Monthly Insight

Letting go of inflation worries

Mar 29, 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

How the Fed is adjusting to a more resilient economy.

The Fed is shifting its position on monetary policy relative to an economy that is operating at a good, even if decelerating, rate of growth. In particular, the Fed is now giving more consideration to the fact that inflation has been, and still is, quite contained. We view this as a meaningful development in that the Fed is willing to be patient and allow the economy to stretch a bit.

The U.S. economy is witnessing some of the most stable growth and inflation in its history. Its remarkable resilience is a function of a more service/consumption-oriented economy, which is less subject to the boom-and-bust gyrations of the previously more manufacturing-based economy, and hence requires less monetary policy tweaking than before.

We believe the Fed will now allow inflation to run a bit hotter going forward, if indeed that ever happens, given the assumed ability of the economy to recalibrate itself back to a normal run rate of growth. That said, we expect inflation to remain moderate for years to come given a paradigm shift to lower potential growth, technology-driven productivity, and limited spending by companies experiencing margin pressure amid increasing wages.

In the BlackRock Strategic Income Opportunities Fund, overall duration stood at 2.6 years as of the end of February. With the yield curve being relatively flat, we reduced long-end exposure in favor of the front end given our belief that rates will remain range-bound for the near term. Click here for more fund positioning insights.

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Spreads have widened and real rates have moved to attractive levels in 2019. 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 Federal Reserve’s stance on rate and liquidity policy, 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, leaving markets prone to higher levels of volatility.

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 ...