Traditional Fixed Income No Longer Compensates for Risks

Jeff Rosenberg | March 11, 2013 | Topics: Economic Outlook,  Fixed Income 

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Well the core of our expectation for interest rates in 2013 is roughly the market consensus of modest increases in interest rates in 2013. I think the importance for positioning of portfolios is to focus not on the threat of rising interest rates but rather what interest rate risk lends a portfolio in 2013.

Fed's monetary policy stance is broadly characterized by one of negative real interest rates. This means that what investors want and desire most out of their portfolios, the ability to generate income without taking risk, no longer exists. This means that for investors who are seeking income, which is for the vast majority of investors today, getting that income entails taking a degree of risk into their portfolios.
What we see for the positioning of fixed income portfolios is that risk compensation in traditional forms, that is centered around duration or interest rate risk, doesn't fairly compensate for investors for this risk. Rather, the areas of the credit markets. These are broadly described as the areas that finance the private market functions of an economy, areas such as corporate bonds, emerging market debt, areas of the markets that finance private lending through mortgages. These are some of the areas that still provide investors better compensation for the risks that they're taking to achieve income.

But make no doubt about it, this type of investing in fixed income still entails a degree of risk. Managing how much risk is taken in a portfolio for the amount of income that investors are seeking still requires a degree of conversation, a conversation best had with your financial advisor, to determine the degree of risk you're willing to take for the income that is possible to achieve in an environment where the Fed runs at negative real interest rates.

Investing involves risk including loss of principal. The opinions presented are those of Jeff Rosenberg, BlackRock's Chief Investment Strategist for Fixed Income, as of March 4, 2013 and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/or made investment decisions that may, in certain respects, not be consistent with the information contained in this presentation. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this presentation are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Past performance does not guarantee future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the viewer.

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About the Author

Jeffrey Rosenberg
Chief Investment Strategist for Fixed Income

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