Our Christmas Shopping List (and some 2023 Prognostications)

by Rick Rieder, CIO, Global Fixed Income, and Russell Brownback, Head of Global Macro, Fixed Income, Blackrock

1 or more years of additional interest-rate duration in ā€˜23 vs. ā€˜22, to be grown over time: As central banks slow, or pause, their tightening cycles, in sympathy with slowing economic growth and inflation.

2 years of locked-up returns in fixed income assets, at a generational inflection point in yields: A decline in inflation volatility suggests a decline in interest rate volatility too, both from extreme levels.

3 -handle inflation by the end of 2023, driving a decline in rate volatility: Oilā€™s falling price means it is becoming a deflationary impulse, and leading indicators for housing suggest a correction is in motion (the highest-beta and largest components of CPI, respectively).

4 more months (or less) of data/policy uncertainty, after which the Fed can pause: The market has fully priced in another 100 basis points (bps) of hikes over the next four months.

5 years of runway potential for fixed income to generate outsized returns: The higher we climb up the discount rate mountain, the more vertical is created on the other side.

6% to 6.5% of portfolio carry potential (including anticipated curve rolldown): Without needing to take on much duration, credit, convexity or illiquidity risks.

7% carry (including rolldown) potential in U.S. Investment-Grade: Based on historical returns, at similar entry yields.

8 or a high single digit number of significant defaults in 2023: We have probably left the 1% default rate in high yield behind us, but we donā€™t anticipate seeing 2009ā€™s 13% either.

9% nominal GDP may be behind us, but we wonā€™t dip much below 4% NDGP (while the 7 years before the pandemic averaged 3%): The strong labor market will keep real growth from collapsing, even as inflation slows.

10% potential return on mortgages, if yields just went back to the 83rd percentile from over the last 10 years (from the 98th percentile, currently): Supported by shelter inflation that is slowing, but a housing market that is not going into a bust.

11% carry (including rolldown) potential in U.S. High Yield, for those able to venture into the right places: Keeping in mind that defaults will probably rise off record lows, making selectivity critical.

12 months of carry in fixed income hasnā€™t been this exciting in many, many years!

ā€¦and a bunch of equity gamma, funded by a portion of that fixed income carry, to capture the potential for right-tail risk.

For more, check out our forthcoming December Market Insights commentary: Zooming in on Fixed Income in 2023

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