Finally, while we think monetary stimulus is a necessary condition for placing US economic growth on a more favorable trajectory, it is not in our view a sufficient condition. The role that fiscal policy can and must play will be a vital factor that markets will judge in the coming weeks and months. In particular, we think that it is telling that Fed Chairman Bernanke closed his November 4 Washington Post article by arguing for the “combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector” that would be required to solve the economy’s problems. In this we think he is correct, and we hope that cooperation can come to pass, since if it does not, the negative consequences (such as bad inflation or a failure to re-rate to a favorable growth trajectory) increase in likelihood.
Fed Policy Holds an Outsized Global Impact
Sources: Bloomberg.
U.S. Bond Market Outlook
Interest Rates/Duration: We are staying effectively neutral on duration and think that recent Fed action will keep rates near historically low levels.
Treasuries/Agency MBS: We think spread sectors currently offer better relative value and thus remain close to neutral.
Corporates: We remain modestly overweight in selected investment-grade corporates, as favorable fundamentals and technicals should be supportive, but valuations are less compelling than earlier in the year.
High Yield: Strongly supportive technical factors and attractive relative value continues to drive demand for high yield issues, but we continue to favor the higher-quality part of this market.
Securitized Assets (MBS, ABS, CMBS): The securitized sectors continue to offer selective opportunities, particularly with recent underperformance in non-Agency MBS and ABS sectors
Non-US Dollar: We are broadly neutral on non-dollar assets, as we continue to have concerns regarding both sovereign headline risk in peripheral Europe and currency volatility.
About Rick Rieder
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fixed Income, Fundamental Portfolios, and is Head of Multi- Sector & Mortgages and Corporate Credit Strategies. He is a member of BlackRock’s Fixed Income Executive Committee, and also a member of its Leadership Committee.
The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Investments in non-investment-grade debt securities (“high yield” or “junk” bonds) may be subject to greater market fluctuations and risk of default or loss of income and principal than securities in higher rating categories. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
