Selective Sector Positioning In Fixed Income

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Includes: MAHQX
by: BlackRock
Summary

How we’re positioned for today’s bond markets.

Amid tight valuations and the risk-off market tone since the beginning of February, we remain neutral in investment grade credit.

We reduced the fund’s overweight exposure to emerging markets as the sector continued to see selling pressure this month.

Securitized assets, such as non-agency mortgages and collateralized loan obligations, performed well in May as they often do in a low-yield environment. Holding an overweight to the sector helped drive positive performance in the BlackRock Total Return Fund during the month, while an overweight to emerging market debt hindered results given selling pressure in the sector as the U.S. dollar strengthened.

The fund's diversified sources of return across fixed-income asset classes

Chart: The fund

Source: BlackRock as of 5/31/18. Quarterly return attribution is based on gross returns of the fund’s Institutional share class. U.S. Relative Value: The fund’s U.S. relative value strategies reflect the portfolio management team’s specific views on the mortgage market. Macro: The macro strategy is how the portfolio management team implements thematic and macro-economic investment views through duration, yield curve and foreign-currency positioning. Residual: This non-attributable portion of the fund’s total return is derived from trading and allocation effects across the fund’s investment strategies. For standardized performance, click here.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. All returns assume reinvestment of all dividend and capital gain distributions. Refer to blackrock.com/tr for current month-end performance.

During the month, we narrowed the fund’s underweight duration position relative to the benchmark index, ending the month of May with an effective duration of 5.70 years. We continue to hold a yield curve-steepening bias with an overweight on the front end, where we see attractive yields with less sensitivity to higher interest rates. We believe long-end rates will move marginally higher in the medium term amid solid global growth, inflation that is firming yet contained, and broadly less accommodative monetary policy from developed market central banks.

Amid tight valuations and the risk-off market tone since the beginning of February, we remain neutral in investment grade credit, although we recently added to some shorter-dated bonds at attractive entry points. We maintained the fund’s small allocation to high yield credit as the sector performed well this past month. We continued to hold an overweight in agency mortgages and increased our overweight to municipals as a high-quality diversifier away from corporate bonds and longer-dated Treasuries.

We reduced the fund’s overweight exposure to emerging markets as the sector continued to see selling pressure this month, but we maintain positions in select countries where fundamentals remain supportive, including Brazil, Argentina and Mexico.

This post originally appeared on the BlackRock blog.

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All fund performance and data based on Institutional shares, all other share classes will vary. Institutional shares are not available to all investors and that performance, fees, and ranking data for various share classes could be higher or lower.

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International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Short-selling entails special risks. If the fund makes short sales in securities that increase in value, the fund will lose value. Any loss on short positions may or may not be offset by investing short-sale proceeds in other investments.

The Fund's use of derivatives may reduce the Fund's returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund's hedging transactions will be effective.

The opinions expressed are those of the fund's portfolio management team as of May 2018, and may change as subsequent conditions vary. Information and opinions 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. 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 reader. Percent of net assets figures represent the Fund’s exposure based on the economic value of securities adjusted for futures, options, swaps and convertible bonds.

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